Credit Bubble Bulletin 061717

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Chuck Prince was still dancing in the summer of 2007. Everyone was locked into the dance party, as the market disregarded the subprime fiasco while rallying to record highs in mid-October 2007. By the end of 2007, few were interested in hearing another word about the Bubble. There are parallels to 2007 - as well as to the Q1 2000 (along with 1998!). The great nineties bull market culminated in a final short squeeze and derivatives-related melt-up. For the current long cycle, central banks are anything but fledgling institutions. Never failed. The Fed and global central bankers will clearly do whatever it takes to avoid another financial crisis. Global central banks moved to adopt aggressive "whatever it takes" stimulus measures in late-2012. It has been fueled by an unprecedented international boom in central bank Credit and sovereign debt. It was only fitting that Xi’s overstated exultation elicited a shot of sobriety from China’s respected central bank chief (from his catbird seat).

May 24 - Bloomberg (Paul Panckhurst): “Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy. The stepped-up censorship… represents an effort by China’s leadership to quell growing concerns about the country’s economic prospects as it experiences a prolonged slowdown in growth. At his point, this ensures that few contemplate a scenario where policymakers are without the capacity to sustain robust markets and economic growth. Today's central bankers are destroying the sanctity of money with no meaningful pushback. Again, to bet against great wall 99 would at this point appear irrational. November 14 - Reuters (Balazs Koranyi and Francesco Canepa): “Four of the world’s top central bankers promised… August 23 - Reuters (Steve Holland and Dave Graham): “President Donald Trump delivered an angry and forceful defense of his response to the violence in Charlottesville, Virginia, declaring at a campaign-style rally of supporters in Phoenix that the news media had distorted his position. Donald Trump can be excused these days for brimming with over-confidence. Japan’s prime minister has agreed with President Donald Trump, every time.

It evolved into a comprehensive Bubble of mispriced finance on both national and international scales, which over time led to deepening structural impairment to both financial systems and real economies. It won't be viewed as such by historians, but in real time the complacent bullish view is rational. I hold the view that Bubbles are much more about fits of deceptively rational behavior. Overnight lending rates and Treasury yields are the pillar for a broad range of rates and market yields - at home as well as abroad. Japanese 10-year JGB yields declined 3 basis points this week to 1.17%. Emerging debt markets performed particularly well considering Treasuries. Three-month Treasury bill rates ended the week at 2.06%. Two-year government yields added a basis point to 2.63% (up 74bps y-t-d). The S&P500 slipped 0.2% (down 4.9% y-t-d), and the Dow declined 0.3% (down 8.1%). The Utilities jumped 2.8% (down 6.9%). The Banks dropped 2.7% (down 6.4%), and the Broker/Dealers fell 2.6% (down 8.7%). The Transports declined 0.2% (down 12.1%). The S&P 400 Midcaps were little changed (down 2.7%), while the small cap Russell 2000 gained 0.5% (down 3.4%). The Nasdaq100 (up 2.1%) and the Morgan Stanley High Tech index (down 0.4%) were both unchanged.

In Beijing, prices fell 0.4%, the biggest decline in two years, and in Shanghai the decline was 0.2%. That compared with increases in some smaller cities, such as Bengbu in Anhui, where the gain was about 2%, translating into a 17% increase from a year earlier. GDP exceeded 2% in 2007's 2nd, 3rd and 4th quarters, with Q4's 2.5% expansion the strongest in a year. July 12 - Bloomberg: “China’s overseas shipments rose from a year earlier as global demand held up and trade tensions with the U.S. The U.S. economy is strong and largely immune to global factors. The move could provide the economy with some short-term help. Risk-takers have gravitated to the top - in the markets, in company management, in venture capital, at banks, and generally throughout the economy. Centralized finance linked seemingly disparate housing markets, securities markets, asset classes, financial systems and national economies. May 11 - Wall Street Journal (Scott Patterson): “Money from state-run Chinese companies was used to help finance the buildup of a massive aluminum stockpile that has crisscrossed the globe, depressed prices and sparked a criminal investigation in the U.S., according to business records, emails and people with direct knowledge…