Doug Noland, Credit Bubble Bulletin wrote:
> Trouble at the “Periphery” has definitely taken a troubling turn
> for the worse. Hope that things were on an uptrend has confronted
> the reality that things are rapidly getting much worse. ...
> Importantly, the past month has seen contagion effects from the
> collapsing Bubble at the Periphery penetrate the Fragile Core. ...
> Recent weeks point to decisive cracks at the “Core” of the
> U.S. financial Bubble. The S&P500 has been hit with an 8.0%
> two-week decline. Notably, favored stocks and sectors have
> performed poorly. Indicative of rapidly deteriorating economic
> prospects, the Dow Transports were down 10.9% to begin 2016. The
> banks (KBW) sank 12.9%, with the broker/dealers (XBD) down 14.1%
> y-t-d. The Nasdaq100 (NDX) fell 10%. The Biotechs were down 16.0%
> in two weeks. The small cap Russell 2000 was hit 11.3%. ...
>
> Bubbles tend to be varied and complex. In their most basic form, I
> define a Bubble as a self-reinforcing but inevitably unsustainable
> inflation. This inflation can be in a wide range of price levels –
> securities and asset prices, incomes, spending, corporate profits,
> investment and speculation. Such inflations are always fueled by
> some type of underlying monetary expansion – typically monetary
> disorder. Bubbles are always and everywhere a Credit phenomenon,
> although the underlying source of monetary fuel often goes largely
> unrecognized.
> I’ll posit another key Bubble Dynamic: De-risking/de-leveraging at
> the Periphery is problematic, with a propensity for risk aversion
> and associated liquidity constraints to spur contagion effects. At
> the Core, de-risking/de-leveraging becomes highly
> destabilizing. Indeed, I would strongly argue that de-leveraging
> at the “Core of the Core” is tantamount to financial crisis.
> It is the “Core of the Core” that now concerns me the most. That
> is where Federal Reserve (and global central bank) policies have
> left their greatest mark. It is at the “Core of the Core” where
> momentous misperceptions and market mispricing have become deeply
> entrenched. It’s the “Core of the Core” that has attracted
> enormous amounts of “money” over recent years. It’s also here
> where I believe leverage has quietly been used most
> aggressively. Over recent years it became one massive Crowded
> Trade. Now the sophisticated players must contemplate beating the
> unsuspecting public to the exits.
> I’ll return to “Core of the Core” analysis after a brief diversion
> to the “Core of the Periphery.” At $275 billion, Chinese Credit
> growth surged in December to the strongest pace since June. While
> growth in new bank loans slowed (15% below estimates), equity and
> bond issuance jumped. China’s total social financing expanded an
> enormous $2.2 TN in 2015, down slightly from booming 2014. Such
> rampant Credit growth was (barely) sufficient to sustain China’s
> economic expansion. At the same time, I would argue that Chinese
> stocks, global commodities and developing securities markets in
> particular have been under intense pressure due to rapidly waning
> confidence in the sustainability of China’s Credit Bubble.
> A similar dynamic is now unfolding in U.S. and other “Core”
> equities markets: Sustainability in the (U.S. and global) Credit
> Bubble - the monetary fuel underpinning the boom - is suddenly in
> doubt. The bulls, Fed officials and most others see the economy as
> basically sound, similar to how most conventional analysts argued
> about the Chinese economy over the past year. Inherent fragility
> and unsustainability are the key issues now driving securities
> markets – in China, in the U.S, and globally. And, importantly,
> sentiment has shifted to the view that policy tools have been
> largely depleted.
>
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