Contagion

Credit Bubble Bulletin/Doug Noland

Repost from 10-12-2021

“Beijing waited much too long to begin reining in its Bubble. Pandemic stimulus stoked already perilous excess. Now Chinese officials face a terrible predicament and onerous decisions. At this point, large liquidity injections could further stoke inflationary pressures, while risking a disorderly decline in the Renminbi. The Fed waited much too long to begin reducing historic monetary stimulus. Pandemic stimulus stoked already perilous excess. Federal Reserve officials could soon face quite a predicament and difficult decisions.”

graphic image of a red dominoe starting a chain reaction“Was the jobs report good enough for a November taper? That just doesn’t seem the crucial question today. What does the world look like a month from now? Has China’s unfolding crisis by then enveloped the ‘Core’? How powerful are de-risking/deleveraging dynamics in November, globally and in U.S. markets? My thoughts harken back to the March 2020 dislocation in bond (and equities) ETFs. Since then, Fed pandemic measures have spurred additional gargantuan bond fund inflows (at historically low bond yields), while simultaneously unleashing powerful inflationary dynamics. Quite a combustible mix. Clearly, the Fed is not about to ‘slam on the brakes.’ Might the bond market?”

USAGOLD note:  In this lengthy piece, Noland chronicles the unfolding debt crisis starting with China and Evergrande and working his way in careful detail to the contagion, as he now labels it, beginning to “wash up on our shores.” Noland conveys a sense that things could spin out of control, launching a crisis that could once again catch the bulk of investors by surprise. Secretary of State Blinken directed comments to China last week that serve as a wake-up call for western financial markets as well. He said that China should act “responsibly and deal with the challenges” imposed by the ongoing meltdown in its real estate and credit markets. What the country does economically, he said, “is going to have profound ramifications, profound effects, on literally the entire world because all of our economies are so intertwined.” In short, Blinken, too, is raising the specter of a contagion.

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