Loading ...Weekly Commentary: Extraordinary Q1 2020 Z.1 Flow of Funds
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 think how much Chinese Credit will grow this year – Credit of Rapidly Deteriorating Quality. How long can systemic risk continue to inflate parabolically?
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 for 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 Q1 Z1 report, I was thinking this is how things look as a system self-destructs. Q2 will be worse.