Credit Bubble Bulletin

Credit Bubble Bulletin2020-05-20T17:01:05-06:00

Presented by Doug Noland

Daily Commentary

Thursday, May 28, 2020

[MarketWatch] Stocks edge higher after Dow retakes 25,000 even as jobless toll tops 40 million

[Reuters] Europe cheers super-sized stimulus plan, U.S.-China tensions simmer

[Yahoo/Bloomberg] China Arrests Yuan Tumble With Stronger-Than-Expected Fixing

[Reuters] Oil falls as surprise U.S. stock build douses demand recovery hopes

[CNBC] US first-quarter GDP falls 5.0%, vs 4.8% drop expected

[USAT] 2.1M more Americans file for unemployment, bringing 10-week total to 40M amid coronavirus

[Reuters] U.S. core capital goods orders, shipments tumble in April

[Reuters] China parliament advances Hong Kong security law as tensions with U.S. rise

[CNBC] House sends China sanctions bill to Trump’s desk as tensions escalate

[AP] Trump preparing order targeting social media protections

[CNBC] Coronavirus live updates: Global tourism could fall 70%; EU official says more stimulus needed soon

[Yahoo/Bloomberg] Turkey’s Central Boosts Short-Term FX Borrowing to a Record

[Yahoo/Bloomberg] U.S.-China Tensions Fail to Stop Asia’s Humming Bond Deal Machine

[Reuters] South Korea coronavirus cases jump to highest since early April as warehouse outbreak widens

[Bloomberg] U.S.-China Tension Only Set to Get Worse: ‘There Is No Off Ramp’

[Bloomberg] Trump-China Feud Is Increasing Risks for Markets and Economy

[Bloomberg] Big Bankruptcies Sweep the U.S. in Fastest Pace Since May 2009

[Bloomberg] Bank of Korea Cuts Rates to Record Low in Bid for Recovery

[WSJ] How the U.S. Could Really Hurt China

[WSJ] Investment in U.S. Shale Projects to Halve in 2020, IEA Says

[FT] Hong Kong is the battleground in a US-China cold war

[FT] Businesses swallow ‘bitter medicine’ of Hong Kong security law

[FT] Covid-19 crisis highlights supply chain vulnerability

Weekly Commentary

May 15, 2020: Global Bubbles are Deflating

“Bubble” is commonly understood to describe a divergence between overvalued market prices and underlying asset values. And while price anomalies are a typical consequence, they are generally not among the critical aspects of Bubbles. I’ll start with my basic definition: A Bubble is a self-reinforcing but inevitably unsustainable inflation.

Bubbles, at their core, are fueled by Credit – or “Credit inflation.” Asset inflation and speculative asset price Bubbles are a common upshot. At their core, Bubbles are mechanisms of wealth redistribution and destruction.

The more protracted the Bubble period, the greater the maladjustment to underlying financial and economic structures. And the longer the Bubble inflation, the greater the wealth disparities and underlying social and political strain. While Bubble-related inequalities reveal themselves more prominently later in the up-cycle, the scope of wealth destruction only becomes apparent as the Bubble finally succumbs. As Dr. Richebacher always stressed, there’s no cure for Bubbles other than not allowing them to inflate. The catastrophic policy failure over the past 20 years has been the determination to aggressively inflate out of post-Bubble stagnation.

Bubbles can have profound geopolitical impacts as well. The inflation of Bubbles and corresponding booming economies promote the view of an expanding global economic “pie”. The inflating Bubble phase is associated with cooperation, integration and solidarity. The backdrop shifts late in the Bubble phase, as inequities and maladjustment become more discernible. Bursting Bubbles mark a radical redrawing of the geopolitical landscape. The insecurities and animosities associated with a shrinking economic pie see a rise of nationalism and “strongman” leadership. The backdrop drifts toward fragmentation, disintegration and conflict.

Regular CBB readers are familiar with this analytical framework. It is being reiterated this week because of the value I believe it provides in understanding this most extraordinary of environments. To disregard that the world was late in a historic Bubble period prior to COVID leaves analysts disadvantaged. Whether in the markets, real economies, politics or geopolitics, Bubble Dynamics these days play a profound role. This is becoming clearer by the week.

Let’s start with the markets. So, U.S. equities have diverged dramatically from underlying fundamentals. Most believe this is simply the marketplace peering over the valley to the reemergence of growth once the economy moves past the pandemic. More plausible analysis focuses on the securities price impact from unprecedented monetary inflation. (more…)

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