Doug Noland: 2021 Ran Wild

Books will be written chronicling 2021. I’ll boil an extraordinary year’s developments down to a few simple words: “Things Ran Wild”.

Covid ran wild. Monetary inflation ran wild. Inflation, in general, ran completely wild. Speculation and asset inflation ran really wild. More insidiously, mal-investment and inequality turned wilder. Extreme weather ran wild. Bucking the trend, confidence in Washington policymaking ran – into a wall.

Covid running wild. With the hope for vaccines and a waning pandemic, few anticipated the tragedy of more than 475,000 Covid deaths (exceeding 2020). As the year comes to its conclusion, we are shocked by daily new cases exceeding 500,000 – and two million for the week. Globally, daily cases exceed two million.

Inflation running wild. CPI surged 6.8% y-o-y in November, the strongest consumer price inflation since June 1982. Core PCE, the Fed’s favored inflation gauge, rose above 6% for the first time since 1983. Surging food and energy prices, in particular, punish those who can least afford it.

Monetary inflation running wild. Federal Reserve Credit expanded $1.391 TN over the past year, or 19%, to a record $8.742 TN. The Fed’s balance sheet inflated an astonishing $5.015 TN, or 135%, in the 120 weeks since QE was restarted in September 2019. Federal Reserve Assets have now inflated 10-fold since the mortgage finance Bubble collapse.

M2 “money” supply inflated another $2.478 TN (12 months through November) to a record $21.437 TN – with egregious two-year growth of $6.185 TN, or 40.6%. Bank Deposits surged $1.957 TN over the past year (12.1%), with two-year growth of $4.812 TN (36%). Money Fund Assets rose another $408 billion y-o-y, or 9.5%, to $4.70 TN. The myth that QE effects remain well contained within Treasury and securities markets has been debunked.

In the seven pandemic quarters through Q3 2021, Non-Financial Debt surged $9.183 TN, or 16.8%, in history’s greatest Credit expansion.

The Federal Reserve’s historic experiment in inflationism ran wild. CNBC: “El-Erian Says ‘Transitory’ Was the ‘Worst Inflation Call in the History’ of the Fed.” For those fretting a policy mistake in 2022, the harsh reality is that policy mistakes have been compounding for years – the primary risk of discretionary monetary management recognized generations ago.

We need to place the Fed’s 2021 blunder into proper context. Compound mistakes over a long period, and associated risks explode exponentially. The Federal Reserve is now 13 years into a failed QE experiment. As history teaches, once monetary inflation is unleashed it becomes extremely difficult to rein in. “Just one more year of money printing – only one more crisis or downturn to overcome.” It just doesn’t stop. Moreover, the Fed is 25 years into a flawed experiment of using the securities markets as the primary mechanism for system stimulus (as opposed to the traditional principal role held by the banking system and lending).

The Fed blew its transitory inflation call. Moreover, it clung to the misguided notion of a weak jobs market as justification for keeping the printing press running full tilt. Despite pockets of weakness (i.e. leisure and hospitality) and an extraordinary exodus from the workforce, overall labor market dynamics were governed by tight conditions. January’s eight million job openings (“JOLTS” data) surpassed 11 million by July. For comparison, job openings averaged 4.6 million over the period 1999 to 2019. The unemployment rate dropped precipitously, from January’s 6.3% to November’s 4.2%. As companies struggled to retain and attract employees, workers enjoyed their strongest bargaining power in decades.

It wasn’t just rising compensation that ensured inflation became deeply rooted. Massive monetary and fiscal stimulus – along with associated asset inflation-induced gains in perceived wealth – stoked unprecedented spending. The monthly U.S. Goods Trade Deficit ballooned to a record $98 billion in November (two-decade average $56bn). A unique confluence of extreme global monetary inflation, excessive demand, and Covid-related disruptions (and some weather impact) forged an inflationary supply chain nightmare.

December 5 – New York Times (Lazaro Gamio and Peter S. Goodman): “Ships stuck at sea, warehouses overflowing, trucks without drivers: The highly intricate and interconnected global supply chain is in upheaval, with little end in sight. The turmoil has revealed how the need to ship surgical masks to West Africa from China can have a cascading effect on Ford’s ability to put back-up cameras on its cars at factories in Ohio and delay the arrival of Amazon Prime orders in Florida in time for the holidays. In one way or another, much of the crisis can be traced to the outbreak of Covid-19.”

Open-ended “whatever it takes” QE had fundamentally altered perceptions and market function. The Fed, of course, is not solely to blame for surging prices. But along with its inflationary money printing, QE operations granted spendthrift Washington a blank checkbook.

The fiscal 2021 federal deficit reached $2.77 TN, with a historic $5.90 TN two-year shortfall (28% of GDP). Outstanding Treasuries ended Q3 at $24.250 TN, up from year-end 2007’s $6.051 TN. Treasuries surged $5.678 TN in seven quarters, matching the total amount of accumulated federal debt through 2006. Treasuries ended Q3 at 105% of GDP, up from Q4 2007’s 41%.

During his November 3rd post-meeting press conference, Chair Powell explained QE’s impact: “[Asset purchases] will drive down longer-term rates and hold them lower – and rates right across the rates spectrum matter for borrowers. So, lower rates encourage more borrowing, encourage more economic activity, people can service their debt. You have more free cash flow – it’s not different from what we do at the short end.”

The conventional (“portfolio balance”) economic view of QE effects ignores the reality of the Fed creating and injecting Trillions of purchasing power directly into the system. And depending on the prevailing inflationary biases in the asset markets and real economy, QE can exert profoundly disparate inflationary effects. The $1.0 TN post-Bubble QE1, for example, largely accommodated market deleveraging, deceptively feeding the notion of QE as non-inflationary. Resume QE when markets have attained powerful inflationary biases (i.e. 2019), and the additional liquidity will spur manic excess. Throw Trillions into highly exuberant markets, and the upshot will be a full-fledged mania. Manias ran wild in 2021.

December 26 – Bloomberg (Matt Turner): “Superlatives followed one after another in 2021’s wild ride for U.S. stock investors. The most all-time highs in 26 years. Triple-digit rallies in some small caps thanks to retail-trader frenzies. A $1 trillion rout after China cracked down on some of its biggest companies… Flush with cash and trapped at home due to the ongoing pandemic, retail traders started the year by supercharging the so-called meme stocks. GameStop Corp. and AMC Entertainment Holdings Inc. were emblematic of the movement as investors flooded social media platforms with calls to buy shares of the struggling companies. AMC Entertainment has skyrocketed more than 1,200% and GameStop rallied about 700%.”

New record highs in the S&P500 – 70 times. A short squeeze for the history books. Meme stock mayhem. The SPAC craze. A record IPO boom. Unparalleled “retail” market participation/enthusiasm and unprecedented speculative excess. Meanwhile, the VIX Index remained elevated throughout much of the year (averaging almost 20), with multiple bouts of skittishness pushing the VIX above 25. Archegos 10-times (or more) levered in stocks, financed by some leading Wall Street brokerage firms. A prolonged period of extreme trader bullish sentiment.

While it had been building for years, it became an indisputable fact in 2021: The stock market offers a can’t lose proposition. There will, of course, be pullbacks. But stocks ALWAYS recover and trade to higher highs.

December 12 – Wall Street Journal (Michael Wursthorn): “A historic surge of cash has swept into exchange-traded funds, spurring asset managers to launch new trading strategies that could be undone by a market downturn. This year’s inflows into ETFs world-wide crossed the $1 trillion mark for the first time at the end of November, surpassing last year’s total of $735.7 billion, according to Morningstar Inc. data. That wave of money, along with rising markets, pushed global ETF assets to nearly $9.5 trillion, more than double where the industry stood at the end of 2018. Most of that money has gone into low-cost U.S. funds that track indexes run by Vanguard Group, BlackRock Inc. and State Street Corp., which together control more than three-quarters of all U.S. ETF assets.”

Why not leverage a sure bet? Options trading gone wild.

September 26 – Wall Street Journal (Gunjan Banerji): “Nine of 10 of the most-active call-options trading days in history have taken place in 2021, Cboe Global Markets data show. Almost 39 million option contracts have changed hands on an average day this year, up 31% from 2020 and the highest level since the market’s inception in 1973, according to… the Options Clearing Corp.”

December 30 – Wall Street Journal (Gunjan Banerji): “By one measure, options trading, which can be riskier than stock trading, is on track to surpass stock activity for the full year for the first time, according to Cboe Global Markets data as of Dec. 28. In 2021, the daily average notional value of traded single-stock options has exceeded $467 billion, compared with around $410 billion of stocks.”

November 12 – Wall Street Journal (Gunjan Banerji): “Options trading has soared this year and, by one measure, hit a fresh high in October. More than $890 billion of single-stock options changed hands on Oct. 29, the highest level ever, according to Goldman data. And activity in the options market has continued to eclipse stock trading, based on the notional value of options changing hands.”

Vulnerable emerging markets experienced some scary moments – and generally, EM currencies and bonds performed poorly. The strong dollar and faltering Chinese Bubble were negative developments. For the most part, however, fundamental deterioration was largely offset by Trillions of global QE, surging U.S. trade deficits, and booming U.S. and “developed” markets. The year ended ominously for fragile Turkey, with the lira collapsing and bond yields spiking.

Holders of U.S. Treasury notes and bonds suffered losses (TLT EFT returned negative 4.60%). Outperforming (riskier the better) junk bonds posted solid 2021 performance (HYG ETF returned 3.75%). Investment-grade corporate bonds posted small losses (LQD EFT returned negative 1.84%). It was yet another year of huge corporate bond issuance. A record $463 billion of junk bonds were sold. At $475 billion, municipal bond issuance was only slightly below 2020’s record. A record $186 billion of CLOs (collateralized loan obligations) came to market, about 40% ahead of the previous high in 2018.

December 27 – Financial Times (Eric Platt, Nicholas Megaw and Joe Rennison): “Companies raised a record $12.1tn in 2021 by selling stock, issuing debt and inking new loans, as a torrent of central bank stimulus and the rapid recovery from the pandemic propelled many global markets higher. With a few days still left in the year, the cash haul is already up almost 17% from 2020, which was itself a historic year, and almost a quarter above the take in 2019 before the coronavirus crisis, according to Financial Times calculations based on Refinitiv data. The ferocious pace of fundraising underscores just how easy financial conditions are in many parts of the world, most notably the US, where more than $5tn was raised.”

Cryptocurrencies running wild…

After beginning the year at about $28,000, Bitcoin traded to almost $65,000 in April, sank back below $30,000 in July, before posting an all-time high on November 10th at $68,992. Bitcoin ended 2021 just below $47,000 – gaining 60% for the year. Ethereum surged more than 400%.

December 29 – CNBC (Taylor Locke): “It’s been a record year for the cryptocurrency market, which briefly surpassed $3 trillion in value in November. Bitcoin, the largest cryptocurrency by market value, and ether, the second-largest, hit all-time highs, while altcoins, like meme-inspired dogecoin, surged in popularity.”

NFT speculation running wild…

December 29 – Fortune (Akayla Gardner): “Among the three largest digital tokens by market value, Binance Coin, or BNB, significantly outperformed its two larger rivals Bitcoin and Ether. The coin—issued by crypto exchange Binance Holdings Ltd.—gained roughly 1,300% in 2021… By comparison, market leader Bitcoin increased 65% while Ether, the second-biggest token, rose 408%. BNB is used widely on Binance, the world’s biggest crypto exchange by volume. Other alternative coins, or ‘altcoins,’ saw major gains in 2021, benefiting from an explosion in investor interest for digital assets and an expansion of the crypto ecosystem. Solana and Fantom, coins connected with other blockchain platforms that support smart contracts, outpaced Binance Coin’s returns, for instance.”

December 28 – Grit Daily (Juan Fajardo): “With just 1 week to go until the end of 2021, the Non-Fungible Token ecosystem has already seen its most successful year since the first NFT was minted back in 2014. NFTs have generated over $23 billion in trades this year… While the top 100 NFT collections generated $16.7 billion in trading volume several individual sales were the biggest contributors… Names like Beeple, Pak, xCopy, CryptoPunks, Axie Infinity, Decentraland, NBA Top Shot, and more, became synonymous with NFTs in popular cultures… NFT # 1: The Merge – PAK Sale price: $91.8 million. Sold earlier this month on December 4th, The Merge broke the record not only for the most expensive NFT ever sold but also for the most expensive artwork sold by living artists. Created by an anonymous artist known only by the pseudonym ‘Pak’, the artwork saw 28,983 collectors buy 312,686 units NFTs, which conformed to the entirety of the artwork… This fractional nature means that theoretically, the artwork has no owner… NFT #2: Everydays: the First 5000 Days – Beeple Sale price: $69.3 million. This artwork by Mike Winkelmann, who goes by the professional name of Beeple, was the record holder for the most expensive NFT prior to ‘The Merge’. The artwork depicts the work Beeple started back in 2017 when he set to create a new digital picture every day for 5,000 straight, which were then combined into the ‘Everydays: the First 5000 Days’.”

Deal-making running wild…

December 30 – Reuters (Niket Nishant): “Global dealmaking is set to maintain its scorching pace next year, after a historic year for merger and acquisition (M&A) activity… Global M&A volumes topped $5 trillion for the first time ever, comfortably eclipsing the previous record of $4.55 trillion set in 2007… The overall value of M&A stood at $5.8 trillion in 2021, up 64% from a year earlier, according to Refinitiv. Flush with cash and encouraged by soaring stock market valuations, large buyout funds, corporates and financiers struck 62,193 deals in 2021, up 24% from the year-earlier period, as all-time records tumbled during each month of the year… The United States led the way for M&A, accounting for nearly half of global volumes – the value of M&A nearly doubled to $2.5 trillion in 2021…”

December 30 – Financial Times (Kaye Wiggins, Nikou Asgari, James Fontanella-Khan and Arash Massoudi): “Global mergers and acquisitions for 2021 have soared to their highest levels since records began more than four decades ago, thanks in part to booming markets and widespread stimulus measures… The M&A boom also contributed to record-breaking fees for investment banks in 2021. These totalled $157bn, including $47bn in fees for M&A advice, the most since records began more than two decades ago.”

Add Trillions of system liquidity after home price inflation has attained momentum – with mortgage rates held down (3% or lower for adjustable rates!) to a fraction of housing inflation rates – and the Fed confirms lessons from the “Great Financial Crisis” went unlearned. Housing Bubble excess running wild…

The S&P CoreLogic Case-Shiller U.S. National Home Price Index jumped 19.1% y-o-y (as of October data), the strongest housing inflation in data back to 1988. The 20-city index gained 18.4% – “the hottest markets were Phoenix (up 32.3%), Tampa (28.1%) and Miami (25.7%)” (CNBC). Home sales are on track for the highest volume since 2006. At just over one million units, the available inventory of existing homes was the lowest on record. Through the first three quarters of the year, mortgage Credit expanded at the fastest pace since 2006.  The cost of renting also inflated at double-digit rates.

From CNN (Anna Bahney): “‘It was an insane year,’ said Matt Holm, an agent… in Austin. Last January, he put a smaller five-year-old home on the market at $425,000, higher than comparable sale prices, and was flooded with offers. ‘I stopped counting at 35 offers,’ he said. The home sold for $545,000, a 30% increase over the list price. Another buyer, who bought a lakefront luxury home for $6 million in 2020, was offered $9 million a few months later and $11 million two months after that by buyers desperate for a lakefront property, Holm said.”

Commodities prices running wild.

The Bloomberg Commodities Index jumped 27.1%. WTI Crude surged 55%, with Gasoline futures inflating 58%. Copper jumped 27%, with Aluminum up 42%, Nickel 25%, Zinc 28%, and Tin 91%. The precious metals underperformed, with Gold down 3.7% and Silver falling 11.7%. In the hot soft commodities, Wheat jumped 20%, Corn 23%, Cotton 44%, Coffee 76%, Sugar 22%, and Live Cattle 24%. After beginning the year at $550, Lumber had more than doubled to $1,200 by May, then sank back to $500 before rallying to close the year at $1,143.

The inflation of perceived wealth ran wild.

At a record $163 TN, Household Assets (Fed’s Z.1) surpassed 700% of GDP for the first time. Household Net Worth (Assets less Liabilities) jumped to $145 TN, or 624% of GDP. This compares to previous cycle peaks $70.9 TN (488%) during Q3 2007 and $44.5 TN (445%) back in Q1 2000. Household holdings of Financial Assets reached a record 500% of GDP, up from previous cycle peaks 374% (Q3 2007) and 354% (Q1 2000).

The last time y-o-y inflation was at 6.8%, 10-year Treasury yields exceeded 14%. Ten-year yields ended the year at 1.51%, with inflation-adjusted “real” yields deeply into negative territory.

The 2021 bond market “conundrum” is the most consequential of the year’s extraordinary market dynamics. From an inflation perspective, current market yields are impossible to comprehend. Paltry current yields are much less difficult to explain from the perspective of a historic global Bubble backdrop. As it did in raging risk markets 2007 and $140 crude mid-2008, the prescient Treasury market can look past inflationary risks when it discerns Bubble fragility. With super Bubbles spanning the globe and the Fed’s playbook by now well-worn, the Treasury market is warranted for anticipating a future of endless Trillions of additional QE purchases.

China’s historic Bubble is faltering. The collapse of developer Evergrande – with its $300 billion of liabilities – sparked panic throughout China’s developer (and high yield) bond universe. After ending May at 14%, Evergrande bond yields surpassed 60% in August, on their way to 83% to end the year. Cockroaches everywhere. Kaisa Group yields surged to 51%, Sunshine City to 70%, Shanghai Shimao to 67%, Easy Tactic to 95%, Yuzhou Grand to 58%, China Aoyuan to 60%, and Sunac to 80% – to highlight just a few.

Millions of Chinese, having placed down payments for new apartment units, faced the prospect of long construction delays. Tens of millions fretted their investments in developer “wealth management products.” It is unclear how much housing information is making its way to the Chinese people. Housing transactions have slowed markedly. Prices have begun to weaken, though data don’t appear to reflect the steep discounts offered by financially stressed developers.

A year-end CNBC headline: “China’s Big Challenge for 2022: Getting People to Spend Money.” This year marked a profound change in Chinese perceptions. Faith that housing speculation provides a guaranteed vehicle for wealth generation has been shaken. The optimistic view that Beijing has everything under control had to be adjusted. The communist party imposed wide-ranging crackdowns on everything from real estate speculation, financial regulation, technology company dominance, press freedoms, private education, entertainment, video games, and internet “influencers” (among others). The screws were severely tightened on Hong Kong.

After years of exploiting the forces of free market Capitalism as a necessary expedient for national development, chairman Xi shifted Beijing’s focus to “common prosperity,” wealth redistribution, and communist party encroachment upon all aspects of China’s economy and society. Meanwhile, Beijing’s draconian Covid “zero tolerance” policy further burdened a population discombobulated from an overwhelming barrage of momentous change.

Despite major economic and financial risks associated with a faltering Chinese Bubble, for a manic Wall Street it was just one more risk to disregard.

Extreme weather running wild.

December 27 – Washington Post (Jacob Feuerstein): “From record-shattering heat to frigid waves of cold, torrential downpours to relentless drought, 2021 has been a year of extremes in the United States. As personal stories and images illuminate the devastation wrought by the events, the raw numbers also underline the widespread impacts and extraordinary nature of this year’s weather… The United States experienced 18 billion-dollar weather disasters in the first nine months of 2021, totaling more than $104 billion. Driven largely by severe thunderstorms and a relentless hurricane season, this year has so far seen the second-most billion-dollar disasters of any year since 1980, and it could surpass 2020 for the record when events from October, November and December are tallied.”

A year of record heat, drought, rain and wind. A wild weather year comes to an end, with hurricane force winds feeding the worst fire in Colorado history (up to 1,000 homes destroyed). Early in the year, the Texas power grid was at the brink of collapse from a February cold snap. Deaths reached 125, as millions lost power.

Ongoing drought impacted most of the West Coast. Lake Mead (reservoir for the Hoover Dam) and water levels for scores of reservoirs fell to all-time lows. There were the West Coast forest fires. The Dixie Fire was the largest of the California blazes that consumed a sickening 2.5 million acres this past year. “More than 57,000 large wildfires burned nearly 12,000 square miles of land in the U.S. this year, mostly in the hot, dry West…” (

Category four Hurricane Ida made landfall in Louisiana with 150 mph winds ($65bn damage). With 21 named storms, 2021 was the third most active hurricane season on record. July was said to be the “hottest month in human history.” An intense heat wave saw records shattered across Western states – 116 degrees in Portland and 108 in Seattle.

It was a year of extraordinary tornadoes in the Southeast (Kentucky and Illinois) during early March and, extraordinarily, in nine states in December – devastating Mayfield, Kentucky (“Historic tornado outbreak the night of Dec. 10th” –

Globally, there was historic flooding in Germany, Belgium, France, Netherlands, Canada, South Sudan and in China’s Henan province. Drought in South America. Fires in Greece and Turkey. The list could go on and on.

Bubbles, at their core, are mechanisms of wealth redistribution and destruction. Ongoing global Bubbles ensure geopolitical instability and worsening conflict. The year was notable for heightened geopolitical pressures on multiple fronts.

China turned up the rhetoric – and sorties – over the Taiwan issue. Beijing cracked down on Hong Kong, arresting pro-democracy advocates while crushing all opposition. Russia positioned 100,000 troops along the Ukraine border – demanding “security guarantees” from the U.S. and NATO. Iran returned to nuclear talks, as it pushes forward with uranium enrichment and rocket development.

Such a consequential year on all fronts. It just seemed as though the crucial development for 2021 was the wild divergence that ran unchecked between extreme faith in the securities markets and waning confidence in policymaking (along with our nation’s future). The Fed blew it, and only surging stock prices muzzled growing outrage. Bursting asset Bubbles will expose badly depleted confidence in the too powerful institution of the Federal Reserve System. Wall Street late in the year trumpeted the success of Powell’s adept “hawkish pivot,” with unwavering confidence that the Fed won’t dare actually tighten financial conditions and risk bursting myriad fragile Bubbles.

Especially after Omicron, nascent trust in the federal government’s capacity to manage the pandemic has withered away. Faith in vaccines has taken a blow. After almost two years, frustration with inadequate testing has reached the boiling point. In short, our nation’s hope for the pandemic’s approaching end – and a return to normalcy – had the rug yanked right out from underneath. As is often repeated, “our nation is sick and tired of being sick and tired.”

Could our nation possibly be more divided than it was in 2020? Even in a non-election year, a deeply fractured society became only more so in 2021. Epitomizing the disturbing backdrop, to a segment of the population Dr. Anthony Fauci is a devoted public servant and national hero. To others, he is a heinous villain deserving of public ridicule and even death threats to Dr. Fauci and his family. There is ongoing distrust of myriad critical national institutions, including Congress, the Federal Reserve, the CDC, and even “science” more generally – that only gained momentum in 2021. An insecure society quivers, while conspiracy theories run wild.

The year ends ominously. Omicron and Manias. Inflation and ever-widening wealth disparities. Anger, frustration and disillusionment. Irrepressible enthusiasm for stock market and economic prospects – for those fully consumed by the asset markets. A gambling mentality and wanton disregard for risk. Disheartenment for those surviving outside the Bubble, while those on the inside – wallowing in the monetary deluge – bask in the “Roaring Twenties.”

How dark would the public mood dim if securities market Bubbles burst and the deeply maladjusted U.S. economy sinks into recession? S&P500 5,000 in sight! TINA (“there is no alternative”). FOMO (“fear of missing out”). For 2021, there was no taming wild Bubble excess. Paraphrasing the great economist Charles Kindleberger: “There is no more powerful force than the angst of watching your neighbors get rich.”

Original Post 1 Jan 2022

Categories: Perspectives