CORP - Weekly Commentary: Overheated
2024-02-25 11:52:00 ET
Summary
- Investment-grade CDS traded down to 51 bps Thursday, the low back to December 31, 2021. High yield CDS sank to 336 bps, the low since February 1, 2022.
- Nvidia added $155 billion of market capitalization (reaching $2 TN), as stocks surged further into record territory.
- Significant de-risking/deleveraging hit the Chinese stock market. A domestic hedge fund industry that expanded rapidly over recent years is now reeling.
“Periphery and core” and global government finance Bubble analytical frameworks continue to offer a fruitful perspective for better understanding today’s extraordinary backdrop.
At the “periphery,” China’s Bubble deflation has reached another critical stage. Here at the “core,” “Terminal Phase Excess” is also at a critical juncture.
Bloomberg’s Jonathan Ferro: “ You think the biggest risk here is they hold too long, not too soon? ”
Mohamed El-Erian: “ Correct. If they don’t cut in June, you will hear me say, ‘oh no.’ We’re now making the opposite policy mistake that we made back in ‘20/’21. ”
“Terminal Phase Excess” dynamics create great analytical and policy dilemmas. It's likely that the Fed will be viewed as having waited too long to begin easing policy. I fully expect the course of 2024 monetary policy to be debated for years and even decades. The ECB is still pilloried for a final rate hike in early-July 2008, just weeks ahead of all hell breaking loose.
The Fed, on the other hand, began aggressive easing in September 2007, having slashed rates 325 bps by April 30th, 2008. Extending the duration of “Terminal Phase Excess” only exacerbated systemic fragilities, though I’ve not come across analysis exploring this issue. Elevated system Credit growth was sustained, with Q3 2008’s $728 billion Non-Financial Debt expansion second only to Q1 2004.
Importantly, the “Repo” market jumped $319 billion during Q1 2008 to a then record $5.167 TN. Money Fund Assets surged $356 billion during Q1 (to a record $3.443 TN), capping off unprecedented one-year growth of $1.025 TN, or 42%. Agency Securities expanded $1.100 TN in four quarters ended Q2 2008 - to a record $7.886 TN. In short, post-Bubble economic adjustment was postponed, while historic financial imbalances expanded parabolically (and fatefully)....
Weekly Commentary: Overheated