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The Acceleration Phase
Doug Nolan

Global Bubble deflation gathered additional momentum this week. The U.S./global tech Bubble collapse accelerated. Hit by panic “runs”, the historic cryptocurrency mania is coming completely unglued. And even more historic Chinese apartment, financial and economic Bubbles continue to falter.  

Whether stocks, bonds, crypto, or corporate Credit, many are keen to spot a market bottom. There were some elements of “capitulation” this week. And next week’s option expiration creates the potential for a panicked unwind of bearish hedges and attendant short squeezes. Yet we’re only in the initial phase of what will prove a lengthy and most arduous remediation process. Think secular rather than cyclical – a crisis decades in the making. I am reminded of a quote from early in the “Roaring Twenties” bursting Bubble episode: “Everyone was prepared to hold their ground. But the ground gave way.”  

Once again this week, it had all the appearances of one massive global “trade” unraveling. Clearly, de-risking/deleveraging shifted into higher gear. There is seemingly no place to hide.

After beginning the week at $34,000, Bitcoin traded down to $25,488 in early-Thursday panic selling. WSJ: “Crash of TerraUSD Shakes Crypto. ‘There Was a Run on the Bank.’”  

May 12 – Wall Street Journal (Alexander Osipovich and Caitlin Ostroff): “The cryptocurrency TerraUSD had one job: Maintain its value at $1 per coin. Since it launched in 2020, it had mostly done that, rarely straying more than a fraction of a penny from its intended price. That made it an island of stability, a place where traders and investors could stash their funds in between forays into the otherwise frenzied crypto market. This week TerraUSD became part of the frenzy too, slumping by more than a third on Monday and then tumbling as low as 23 cents on Wednesday. The collapse saddled investors with billions of dollars in losses. It ricocheted back into other cryptocurrencies…”

Friday’s rally reduced Bitcoin’s loss for the week to $6,300, or 17.4%, boosting y-t-d losses to 36%. Bitcoin dropped 9.5% Monday, was little changed Tuesday, dropped 8.4% Wednesday, rallied 4.3% Thursday, and added about 4% Friday – trading over the past week with a high-to-low range of 30%. Ethereum fell 9.8% Monday, recovered 1.6%, sank 12.5%, fell 5.4% and then recovered 6.1% Friday - to end the week down 24.5%. XRP slumped 12.1%, recovered 2.0%, sank 27.6%, rallied 3.3% and then jumped 10.9% - to end the week down 29.2%.  

There’s a lot of talk of a crypto trading bottom. It’s important to appreciate that it was Fed QE that stoked a significant speculative Bubble into a raging historic mania. Bitcoin was fading back in 2019. After trading up to $13,852 in June 2019, Bitcoin was down to $7,400 by October – just as the Fed reignited QE. Trillions of monetary inflation and disorder later find scores of cryptocurrencies, stable coins, tokens and the like. We are today witnessing one of the costs of extending a speculative mania – of aggressively creating liquidity that inherently gravitates to areas demonstrating strong inflationary biases (i.e. price inflation and speculative excess). Millions are now suffering losses, many losing meaningful amounts of their savings and retirement accounts. 

Over the past couple years, the cryptocurrencies have morphed from a fringe financial instrument into a widely coveted asset for millions (tens of millions globally). If not for QE, I don’t believe there would have been such a rush by “DeFi” and Wall Street to build out platforms for widespread public participation. Without $5.0 TN of new liquidity, crypto doesn’t become a popular 401k holding. It doesn’t become collateral for mortgages and other loans. Never would it have become institutionally acceptable. Infrastructure would not have been aggressively developed that would so enticingly promote leveraging crypto assets. No QE, no endless “fortune favors the brave” commercials. And there would be less crypto mining and more electricity available for more productive uses.

The entire technology industry would be much different today had the Fed been committed to sound money and Credit. Instead, there were years of reckless overabundance of finance available for almost any endeavor or wild idea. The system is now burdened by unprecedented numbers of uneconomic companies and enterprises that are viable only so long as financial conditions remain exceptionally loose. Yet the halcyon days of exceptionally easy finance have run their fateful course, and it will be a very long time before we experience anything along the lines of the monetary madness experienced over recent years.  

The Nasdaq100 sank 4.0% Monday, recovered 1.3% Tuesday, dropped 3.1% Wednesday, was little changed Thursday, and rallied 3.7% Friday. There was additional corroboration to the bursting Bubble thesis this week. The flow of speculative finance out of the sector accelerated, as financial conditions tighten by the week. The risk of a market accident is growing exponentially.

High-yield CDS traded to 500 bps this week for the first time since July 2020, with junk spreads (to Treasuries) the widest since November 2020. After outperforming in recent months, high-yield bonds have recently come under significant pressure. The iShares High Yield Corporate Bond ETF (HYG) has declined 1.81% so far this month, while the iShares Investment Grade Corporate Bond ETF (LQD) is down only 0.62%. The junk bond market has essentially been closed for new issuance. And, importantly, the leveraged loan market has rather quickly ground to a halt. With their floating rate structures, leveraged loans had remained resilient in the face of an aggressive rate hike cycle. That Bubble has burst, with major ramifications for the flow of finance into higher-risk companies and sectors.  

May 13 – Bloomberg (Jeannine Amodeo): “The US leveraged loan market is in full risk-off mode, forcing bankers to put new offerings on ice until there’s more stability in prices. There’s just three loans in syndication and launches have ground to a halt as the market reels from widespread volatility… Secondary prices have sunk to 95 cents on the dollar on average, spiraling down to November 2020 lows, while loan funds just suffered the biggest weekly withdrawal since April 2020… Funds that invest in US leveraged loans posted the biggest outflow in about two years. The funds lost $598 million of cash for the week ended May 11, according Refinitiv Lipper data. That’s the biggest since the week ended April 8, 2020, during the early days of the pandemic…”

May 12 – Bloomberg (Mary Biekert): “Investors pulled $8.2 billion from U.S. corporate investment-grade bond funds in the biggest weekly exodus since April 2020 amid broad-based market volatility. The outflows for the week ended May 11 are also the fourth largest ever, according to… Refinitiv Lipper, and marks a stretch of seven weeks of withdrawals, the longest since a seven-week period beginning in November 2018. Corporate bond issuance is running well below expectations for the month as inflation-fueled volatility has narrowed windows to sell debt.”

I can’t emphasize enough the ramifications for what I believe is a historic reversal of speculative finance. Repeating a central tenet of my Bubble thesis, contemporary finance appears to function splendidly so long as speculative leverage is expanding and asset prices are inflating. It functions quite poorly in reverse, and it’s now in full reversal – de-risking/deleveraging – mode. And over the years, we’ve witnessed several problematic speculative deleveraging episodes spur dovish pivots, rate cuts, and ever larger QE that invariably thwarted Crisis Dynamics and resuscitated Bubble Dynamics.  

Epic pandemic monetary inflation basically guaranteed eventual collapse. Not only did it stoke powerful inflation dynamics, it also spurred speculative Bubbles and manias that ran to perilous extremes. The system now faces historic Bubble collapses without – at least in the key initial phase – the prospect of Fed rate cuts and monetary stimulus.

Compounding the complex and high-risk U.S. backdrop, there are synchronized Bubble collapses unfolding across the globe. And nowhere are the stakes higher than in China, where Bubble deflation has entered the high-risk Acceleration Phase.  

Aggregate Financing, China’s measure of broad-based Credit growth, expanded $134 billion in April, the weakest reading since February 2020’s $129 billion. Aggregate Financing was down from March’s $685 billion and about half of April 2021’s $274 billion. It was also only 40% of estimates.

New Bank Loans increased only $95 billion (42% below estimates), down from March’s $460 billion and 56% below April 2021’s $216 billion. Year-to-date Loan growth of $1.321 TN was down 1.8% from comparable 2021. At 10.9%, one-year growth was at the slowest pace since February 2006.  

Corporate Loans expanded $85 billion, the weakest expansion since November, and down 23% from April 2021. Year-to-date growth of $1.125 TN, however, was 25% ahead of comparable 2021. Year-over-year growth slowed to 11.8%.  

Importantly, Chinese Consumer Loans contracted $32 billion last month, down from April 2021’s $79 billion expansion. This places four-month (2022) growth at $153 billion, 66% below comparable 2021’s $455 billion. One-year growth dropped to 8.9%, the first single-digit rate in data back to 2007. It’s worth noting that one-year growth exceeded 15% every month from March 2009 through December 2019.

Government Bonds expanded $57 billion, slightly ahead of April 2021, but the weakest growth since July. Year-to-date growth of $292 billion was almost double comparable 2021. One-year growth increased to $1.172 TN, a 16.9% growth rate.

Analytically, there are a few salient points. Credit growth slowed dramatically in April, as the Chinese economy suffered from draconian lockdowns. Moreover, Consumer borrowing has recently collapsed. After averaging quarterly growth of $285 billion over the last 13 quarters, Consumer Loans increased only $29 billion during the past three months. 

Lockdowns, of course, have been a major drag. Yet I believe the lending collapse is indicative of a momentous shift in housing buyer sentiment. The great Chinese apartment Bubble is bursting, and Beijing stimulus measures will now have only muted effects. The days of millions of Chinese borrowing aggressively to speculate in multiple apartment units have run their course. It’s now a matter of how quickly and dramatically prices adjust – along with how long before tens of millions of unoccupied units come to market.

The unfolding apartment bust is a worrying development from a systemic perspective. Ominously, China’s economy has weakened significantly despite ongoing massive Credit expansion. Even with a weak April, one-year growth in Aggregate Financing still exceeded $4.70 TN, or 10.2%. Aggregate Financing splurged an unprecedented $9.0 TN, or 23%, over the past two years, in end-of-cycle Credit mayhem. As China’s apartment and economic Bubbles deflate, the scope of financial and economic structural maladjustment is being revealed.

May 12 – Bloomberg (Shen Hong): “Sunac China Holdings Ltd.’s dollar bond default has prompted analysts to warn of a fresh wave of debt blowups by weaker developers as a liquidity crisis continues to plague the industry. High-yield dollar notes from Chinese issuers dropped for a record eight straight months through April. Issuance has tumbled as global money managers balk at extending credit… Refinancing concerns are flaring as defaults mount and inflation drives rates up globally. The country’s junk dollar notes, which are dominated by real estate firms, declined as much as 2 cents on the dollar Thursday…”

Despite a steady chorus of Beijing assurances, it was another brutal week in the ongoing Chinese developer bond collapse. Evergrande bond yields surged 1,152 bps (11.5 percentage points) to almost 129%, with a four-week gain of more than 22 percentage points. Longfor yields surged 465 bps to 72.11%, and Kaisa yields jumped 542 bps to 89.03% (to name only a few). Perhaps most troubling from a systemic perspective, Country Garden, China’s largest developer, saw yields surge 621 bps this week to a two-month high 20.85% (began 2022 at 6.6%).

While on the subject of “ominous,” Chinese CDS prices extended their surge. Industrial & Commercial Bank CDS jumped to 102 bps, exceeding the March 2020 spike high, to the highest level in data back to 2017. China Construction Bank CDS rose eight to 100 bps, matching the 2020 spike high. China Development Bank CDS rose eight to 97 bps, the high in data back to 2017. And Bank of China CDS rose nine to 99 bps, also exceeding the March 2020 spike.  

China sovereign CDS traded to 87 bps in early-Friday trading, up from 40 bps to start the year and just below the 92 bps March 2020 high. The renminbi dropped another 1.8% this week to the lowest level versus the dollar since September 2020. Vaunted for its stability, the renminbi has suffered a brutal 6.22% loss since April 18th - the worst performance of any Asian currency.

With no indication Beijing is prepared to back away from “Covid zero,” there is now heightened risk of a precipitous drop in consumer/business sentiment and economic activity. The risk of destabilizing capital flight is high. It seems to boil down to one critical question: Can Beijing thwart collapse? 

This week’s interplay between rapidly darkening Chinese prospects and tightening global financial conditions fueled a destabilizing “risk off” dynamic. Selloffs in equities and crypto currencies accelerated. The dollar melt-up powered higher, while many commodities reversed sharply lower. Industrial commodities were under heavy selling pressure, and the precious metals were sold aggressively. It had the appearance of aggressive hedge fund liquidations – de-risking and deleveraging. Losses at Tiger Global the tip of the iceberg?

Global bond yields reversed sharply lower. Ten-year Treasury yields sank 21 bps to 2.92%. Yields were down 28 bps in Italy, 25 bps in the UK, 24 bps in Sweden, 23 bps in Spain, 21 bps in New Zealand, and 18 bps in Germany. The five-year Treasury “breakeven” inflation rate fell 15 bps, while market expectations for the Fed funds rate at the December 14th FOMC meeting dropped 11 bps to 2.72%.

This week from Chair Powell: So, I would say that we fully understand and appreciate how painful inflation is, and that we have the tools and the resolve to get it down to 2%, and that we’re going to do that. I will also say that the process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like.”

And from San Francisco Fed President Mary Daly: “I expect financial conditions to tighten even more… I would like to see continued tightening of financial conditions.”

For its inflation fight, the Fed seeks tighter financial conditions. Not appreciated is that, once commenced, the Fed will not control this process. Financial conditions are now tightening dramatically at the “periphery,” consistent with the “Periphery to Core” analytical framework.  

Recall the abrupt tightening of subprime mortgage Credit that initiated the mortgage finance Bubble collapse. There are, however, critical differences between today’s “periphery” and 2007's. The subprime eruption sparked a tightening of Credit at the fringe of mortgage finance. The impact was initially felt only by a segment of the housing market, while general financial and housing Bubbles were for a while bolstered by declining market yields. Meanwhile, the global economy was supported by powerful inflationary/expansionary dynamics in China and EM generally.

Today’s “periphery” is a vital source of finance for a much broader segment of the economy, particularly technology. High-yield finance (junk bonds, leveraged loans, venture capital, hedge fund leverage, crypto leverage, etc.) is today a key source of finance for our Bubble Economy’s Achilles heel – thousands of uneconomic, negative cash-flow companies and enterprises. Meanwhile, the global backdrop is one of myriad faltering Bubbles, certainly including historic Chinese financial and economic Bubbles. The global system is today acutely more fragile than back in 2008. Moreover, the current geopolitical is fraught with risk. And, finally, global central bankers have no solutions. The old inflationist remedies and schemes have turned lethal.




In November 2016, I ended my almost two-year sabbatical to join David McAlvany and McAlvany Wealth Management.  I’m at the stage of my career that I will only work with people that I trust, respect and admire.  I couldn’t be happier and am really excited with the unique new product we’ve put together, MWM Tactical Short.

The period 1990 to 2015 was an invaluable 25 year experience learning and persevering as a “professional bear”.  My lucky break came in late-1989, when I was hired by Gordon Ringoen to be the trader for his short-biased hedge fund in San Francisco.  Working as a short-side trader, analyst and portfolio manager during the great nineties bull market – for one of the most brilliant individuals I’ve met – was an exciting, demanding and, in the end, a grueling and absolutely invaluable learning experience.  Later in the nineties, I had stints at Fleckenstein Capital and East Shore Partners.  In January 1999, I began my 16 year run with PrudentBear (that concluded at the end of 2014), working as strategist and portfolio manager with David Tice in Dallas until the bear funds were sold in December 2008.      

In the early-nineties, I became an impassioned reader of The Richebacher Letter.  The great Dr. Richebacher opened my eyes to Austrian economics and solidified my lifetime passion for economics and macro analysis.  I had the good fortune to assist Dr. Richebacher with his publication from 1996 through 2001.   

Prior to my work in investments, I worked as a treasury analyst at Toyota’s U.S. headquarters.  It was working at Toyota during the Japanese Bubble period and the 1987 stock market crash where I first recognized my love for macro analysis.  Fresh out of college I worked as a Price Waterhouse CPA. I graduated summa cum laude from the University of Oregon (Accounting and Finance majors, 1984) and later received an MBA from Indiana University (1989).

By late in the nineties, I was convinced that momentous developments were unfolding in finance, the markets and policymaking that were going unrecognized by conventional analysis and the media.  I was inspired to start my blog, which became the Credit Bubble Bulletin, by the desire to shed light on these developments.  I believe there is great value in contemporaneous analysis, and I’ll point to Benjamin Anderson’s brilliant writings in the “Chase Economic Bulletin” during the Roaring Twenties and Great Depression era.  Ben Bernanke has referred to understanding the forces leading up to the Great Depression as the “Holy Grail of Economics.”  I believe “The Grail” will instead be discovered through knowledge and understanding of the current extraordinary global Bubble period. 



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