Loading ...Fragility. Last year exposed myriad fragilities. The U.S. stock market went from all-time highs to an emergency FOMC meeting in ten sessions. The S&P500 lost more than a third of its value in just 21 trading days. Q2 GDP collapsed at a 31% annualized rate. Financial conditions tightened dramatically, with illiquidity and dislocation erupting throughout the markets – equities and fixed income. The year demonstrated the fragility of social stability. Frail confidence in our institutions was similarly revealed.
A historic rally saw stock prices end 2020 at record highs. Financial conditions loosened spectacularly, with the year seeing record investment-grade and high-yield bond issuance. Record IPOs and SPACs. It was a year of surging trading volumes for both equities and options. The Fed’s balance sheet expanded almost $3.2 TN in 43 weeks.
Financial fragilities were exposed – and then seemingly resolved at the generous hands of the Federal Reserve (and the global central bank community).
For years now, my beginning of the year “Issues” pieces have featured a key Credit Bubble maxim: “The Bubble either further inflates or bursts.” While easier to dismiss than ever, this dynamic has never been as germane. The Fed-induced Bubble is raging out of control. Monetary Disorder is acute and highly destabilizing. Sustainability must be questioned.
The system to begin 2021 in the throes of historic late-cycle “Terminal Phase Excess.” One cannot overstate the potential damage this ongoing epic Monetary Disorder can inflict upon financial, economic, social and political stability.
The brazen assault on our U.S. Capitol this week was both terribly distressing and ominous. Covid infections continue to run out of control, with single-day deaths this week surpassing 4,000 for the first time. Meanwhile, Tesla surged 25% this week (794% y-o-y) – increasing market capitalization to $834 billion. Bitcoin surpassed $40,000 this week, with one-week and one-month gains of 38% and 100%. The small cap Russell 2000 jumped 5.9% this week, with the S&P400 Midcaps up 4.8%. The “average stock” Value Line Arithmetic Index rose 4.6%. The KWB Bank Index surged 8.5% during the first five trading sessions of the year. The Philadelphia Oil Services Index jumped 13.6%. Beginning where it left off in 2020, the Goldman Sachs Most Short Index surged 10.1% in a week.
CREDIT BUBBLE BULLETIN—DOUG NOLAND