Q3 was yet another fascinating quarter for U.S. finance. Total Credit (Non-Financial, Financial and Foreign U.S. borrowings) jumped a nominal $1.075 TN, the strongest quarterly gain since Q4 2007’s $1.159 TN, ending September at $74.862 TN (348% of GDP). Total Credit was up $3.230 TN over the past four quarter (4.5%) and $6.446 TN (9.4%) in two years.
Non-Financial Debt (NFD) surged $835 billion during the quarter – double Q2’s growth and the strongest expansion since Q1 2004’s (aberrational) $1.234 TN. At $53.896 TN, NFD ended September at a record 250% of GDP, up from previous cycle peaks of 226% at year-end ‘07 and 183% to end 1999. On a percentage basis, NFD expanded at a 6.32% rate, up from Q2’s 3.15% and Q3 2018’s 4.13%.
Our federal government continues to command the debt bullet train, expanding borrowings at a 10.4% pace during the quarter (strongest since Q1 ’18). Treasury Securities surged a notable $757 billion during the quarter to a record $18.572 TN. Treasury Securities jumped $1.154 TN over the past year and $2.341 TN over two years. Treasury Securities-to-GDP increased to 86%, up from Q4 07’s 41%. A broader measure of Treasury Liabilities ended Q3 at $21.048 TN, or 98% of GDP.
Bank (“Private Depository Institutions”) Assets expanded $245 billion during the quarter, or 5.0% annualized, to $19.753 TN. One-year growth was $829 billion, or 4.4%. Loans increased $118 billion (to $11.580 TN), or 4.1% annualized. Mortgage Loans increased $57 billion, or 4.1% annualized, to $5.597 TN (Total Mortgage Lending increased $185 billion, the strongest quarterly gain since Q4 ’07).
While the bank lending business was rather humdrum, the capital markets side of things was anything but. Bank Debt Securities holdings were up $141 billion, or 12.5% annualized, during Q3 to a record $4.639 TN. Treasuries gained $84 billion ($205bn y-o-y) and Agency/MBS $54 billion ($265bn y-o-y). Total Debt Securities holdings jumped $464 billion, or 11.1%, over four quarters. Bank “repo” Assets declined $23 billion during the quarter to $736 billion, though one-year growth of $193 billion was up 36%.
And while on the subject of booming capital markets, Broker/Dealer Assets jumped $102 billion, or 12% annualized, during Q3 to $3.588 TN (high since Q1 ’13). Over the past year, Broker/Dealer assets surged $394 billion, the strongest one-year growth since 2007. For the quarter, Debt Securities holdings were unchanged at $450 billion, with Treasuries declining $21 billion to $213 billion. Loans increased $3.0 billion, while Equities and Misc. Assets each fell about $5.0 billion. What, then, was the source of such robust overall growth? Security Repurchase Agreements rose $103.3 billion, or 30% annualized. Over four quarters, “repo” Assets surged $302 billion, accounting for 77% of Broker/Dealer Asset growth over the period.
Let’s take a brief diversion from Z.1 data. M2 “money” supply surged $1.044 TN over the past year, or 7.3%. Institutional Money Fund Assets (not included in M2) jumped another $390 billion, or 20.8%. Year-to-date, the S&P500 has returned 28.9%. The Nasdaq Composite is up 31.6%. The Semiconductors (SOX) have surged 55.5%, with the Nasdaq Computer Index up 45.8%. The Banks (BKX) have gained 31.3%. Treasury bonds (TLT) have returned 16.9%. Investment-grade corporates (LQD) enjoy a 2019 return of 17.5%, with junk bonds (HYG) returning 13.3%. Gold has gained 15% so far this year, with Silver up almost 10%. Real estate prices have continued to inflate, along with private businesses, art, professional sports franchises, collectible, etc. It has indeed been the spectacular “everything rally.”
Such extraordinary asset inflation is possible only with some underlying Monetary Disorder. I have argued that international securities finance is at the epicenter of historic Global Monetary Disorder and resulting runaway asset inflation and Bubbles.
When a new Z.1 report was available during the mortgage financial Bubble period, I would immediately jump to the Fed’s “Total Mortgages,” “Agency- and GSE-Backed Securities,” and “Asset Backed Securities” pages. I would then move on to “Fed Funds and Security Repurchase Agreements” (i.e. “repo”). These days, I go directly to “repo” data for illumination of this period’s key source of Monetary Disorder. Q3 did not disappoint.
Total “repo” (“Federal Funds and Security Repurchase Agreements”) Liabilities jumped another $222 billion during the quarter to $4.502 TN, the high going back to Q3 2008. Over the past year, “repo” surged a record $932 billion, or 26.1%. For perspective, “repo” Liabilities rose on average $51.9 billion annually over the past five years. And the $932 billion gain during the past four quarters is more than double the biggest annual rise over the past decade (2010’s $422bn gain that followed the $1.672 TN two-year crisis-period contraction). Ominously, the past year’s gain also surpasses the previous record four-quarter gain ($824bn) for the period ended in June 2007. “Repo” Assets (as opposed to Liabilities) surged $1.087 TN over the past four quarters to a record $4.813 TN.
Who holds these Trillions of “repos”? Broker/Dealers lead with $1.467 TN, followed by Money Market Funds at $1.173 TN; Rest of World at $781 billion; Foreign Banking Offices in U.S. at $403 billion; and the Fed’s recently acquired $203 billion. In extraordinary growth, over the past year “repo” holdings have increased $302 billion for the Broker/Dealers; $252 billion within Money Market Funds; $145 billion for Rest of World; $98 billion at Foreign Banks in the U.S.; and $203 billion at the Fed.
Total Debt Securities (TDS) gained $1.020 TN during the quarter, or 8.9% annualized, to a record $46.742 TN. This huge quarterly expansion was second only to Q1 2004’s $1.177 TN. For comparison, TDS increased $270 billion during Q2 and $449 billion during Q3 ’18. TDS increased $2.115 TN over the past year. For perspective, this is 50% above the average annual growth over the past decade and the largest expansion since 2007. TDS ended September at 217% of GDP (slightly below Q1 ‘13’s record 223%).
Total Equities were down somewhat ($222bn) for the quarter to $49.560 TN, or 230% of GDP. And while this was below Q3 2018’s record 243% of GDP, booming Q4 equities markets will push this ratio back toward all-time highs. Total (Debt and Equities) Securities ended Q3 at a record $96.302 TN, or 447% of GDP (below Q3 2018’s record 458%). For perspective, Total Securities posted previous cycle peaks of 379% of GDP during Q3 2007 and 359% at Q1 2000.
Subdued equities put a damper on the Bubble in perceived household wealth. Household (and Non-Profits) Assets increased $749 billion during Q3 to a record $130.218 TN. And with Household Liabilities up $176 billion to $16.386 TN, Household Net Worth increased $573 billion during the quarter to a record $113.832 TN. For perspective, Household Net Worth peaked during Q3 2007 at $71.346 TN. Household Net Worth has almost doubled from the $60.221 TN trough back in Q1 2009. Surely helping explain the resilient U.S. consumer, Household Net Worth jumped $3.726 TN over the past year and $10.854 TN in two years. Household Net Worth-to-GDP ended September at 528% (down slightly from Q4 17’s record 532%). Previous cycle peaks were at 492% of GDP during Q1 2007 and 446% at Q1 2000.
U.S. securities/“repo” finance is clearly a major source of liquidity for the markets as well as the real economy. Yet this Bubble Dynamic is undoubtedly global, with international securities finance instrumental to inflating securities and asset markets around the world. A Bloomberg article this week referenced a $9.0 TN European “repo” market. There is also a large repo market in Japan, as well as throughout Asia. How much finance to leverage global securities is originating out of the likes of Hong Kong, Singapore and Shanghai? How much global “repo” finance has been flowing into U.S. debt markets?
Rest of World (ROW) holdings of U.S. Assets increased $397 billion during Q3, down sharply from blistering Q2’s $1.017 TN and Q1’s $2.250 TN. After the remarkable Q4 decline ($2.125 TN), ROW holdings are up an astonishing $3.664 TN in nine months, surely a significant contributor to booming asset prices and general Monetary Disorder. In three quarters, ROW holdings of U.S. Debt Securities surged $959 billion, or 11.4%, to a record $12.137 TN. Treasuries jumped $510 billion (to $6.775 TN); Corp Bonds $346 billion (to $3.956 TN); and Agency Securities $93 billion (to $1.171 TN).
Notably, ROW U.S. “repo” Liabilities jumped $292 billion, or 43%, in nine months to $1.207 TN. How much of this ROW market activity – securities buying and “repo” finance – emanates from global “repo” and off-shore financial centers funding leveraged speculation in U.S. securities?
Markets now relish “clarity.” A “phase 1” U.S./China trade deal has, at long last, been inked. The Tories big election win ensures a decisive Brexit. Meanwhile, the (King of Asymmetric) Fed has essentially signaled no rate hikes until after next year’s election (more likely the 2021 inauguration). Any inkling of instability would certainly elicit additional monetary stimulus. Perhaps bond markets are beginning to have an issue with all this. Is the Fed really going to expand its balance sheet $500 billion to quell any potential year-end “repo” market pressure? Today’s backdrop becomes even more reminiscent of fateful 1999 (and Y2K).
