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June 13, 2020 | Doug Noland Explains Q1’s “Extraordinary” Debt Binge

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What To Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004 and sold it in 2022.

Credit Bubble Bulletin’s Doug Noland saves the rest of us a lot of time by digging through the Fed’s quarterly financial reports and presenting the results in an understandable form.

These reports are always terrifying, but Q1 2020 is in a class of its own.

Here, mostly in Noland’s words, are some of the highlights of what may go down as the single most outrageous three months in financial history (at least until the current quarter’s numbers are published):

Total Non-Financial Debt (NFD) surged a nominal $1.597 TN during the first quarter ($6.379 TN seasonally-adjusted and annualized) to $54.325 TN. This was the strongest quarter of NFD growth on record, surpassing full-year NFD expansions for the years 2009, 2010, 2011 and 2013. Non financial debt is now up $20.857 TN, or 59%, since the end of 2008. As a percentage of GDP it is a record 260%, compared to previous cycle peaks of 226% (Q4 ‘07) and 183% (Q4 ’99).

Financial Sector borrowings jumped $963 billion during Q1, surpassing the previous record $656 billion from Q3 ’07.

Total Credit (Non-Financial, Financial and Foreign) surged a nominal $2.391 TN for the quarter to $77.861 TN, surpassing previous record growth from Q1 ‘04 ($1.512 TN).

At 102% of GDP, US government debt is the highest since World War II,

Combined outstanding Treasury and Agency (i.e., Fannie Mae and Freddie Mac mortgage paper) Securities surged $840 billion during Q1 to a record $29.289 TN, or 137% of GDP. Noland calls this “a replay of the ‘alchemy of Wall Street finance’ dynamic from the mortgage finance Bubble period. Endless “AAA” debt securities these days transform increasingly risky end-of-cycle Credit into perceived money-like, safe and liquid instruments (experiencing insatiable demand).”

Noland concludes:

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 on the part of 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 Fed’s Q1 Z.1 report, I was thinking this is how things look as a system self-destructs. Q2 will be worse.

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June 13th, 2020

Posted In: John Rubino Substack

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