Category Archives: banking

Global Debt Is Exploding At A Shocking Rate, by Tyler Durden

There is no way this will end well. From Tyler Durden at zerohedge.com:

The primary reason why the global financial system is on the verge of daily collapse, and is only held together with monetary superglue and central bank prayers thanks to now constant intervention of central banks, is because of debt. And, as BofA’s Barnaby Martin succinctly puts it, much more debt is coming since “the legacy of the COVID shock is debt, debt and more debt.” In short: use even more debt to “fix” a debt probem.

So in this world of explosive credit expansion coupled with tumbling economic output where helicopter money has become the norm, central banks – and specifically the ECB – are scaling their QE policies to monetize and absorb much of this debt (relieving the pressure on private investors to buy bonds), more debt “hotspots” mean more vulnerabilities for the global economy.

We won’t preach about the consequences of this debt binge which has catastrophic consequences – we do enough of that already – but below we lay out some of the more stunning facts of global debt levels at the end of Q1 2020 as compiled by the BIS, courtesy of Martin:

  • Global debt/GDP surged to an all-time high in Q1 ’20, with overall debt for the non-financial sector now worth 252% of global GDP. This is up from 241% at the end of 2019, the biggest quarterly jump ever according to BIS data.

  • The chart also confirms that central bank inflation targets are higher, much higher than the “”official 2%: to erase this debt, central banks needs inflation to be in the 10%+ range. Anything below that would require debt defaults instead of inflation to wipe away the debt… and that is unacceptable.

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How to Tackle the Depression Head On, by MN Gordon

To tackle a depression head on, the first step is to admit its inevitability, and to pretend that government and central bank debt and spending will prevent one only makes the problem worse. From MN Gordon at economicprism.com:

I want to see people get money.” – Donald J. Trump, U.S. President, September 17, 2020

“Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet.” – Steven Mnuchin, U.S. Secretary of the Treasury, September 14, 2020

Money for the People

The real viral contagion that has infected the American populace is not an illness of the body.  It’s something far worse than COVID-19.  The American populace is suffering from an illness of the mind.

The general malady, as we diagnose it, is the unwavering belief that the government has an endless supply of free money, and the expectation that everyone, except the stinking rich, has claim to it.  Why pursue self-reliance and independence when a series of stimulus acts promises the more abundant life?  This viral contagion’s really ripped through the population in 2020.

For example, just a year ago, the American populace thought they could all live off the forced philanthropy of their neighbors.  That to pay Paul you had to first rob Peter.  The CARES Act proved to Boobus americanus that, without a shadow of a doubt, there’s free ‘money for the people’ in Washington.  Sí se puede!

This week the Congress did its part to further the greatest show on earth.  The people want stimulus.  Congress intends to get to them, in good time.

Of course, the need to sprinkle the Country with printing press money was already a foregone conclusion.  There was no discussion of the wisdom of not having a stimulus bill.  The debate at hand was centered on how much.

Crazy Nancy wants $3.4 trillion.  Senate Republicans want $500 billion.  Something called the House Problem Solvers Caucus wants $2 trillion.

President Trump wants Republicans to “go for the much higher numbers.”  His rationale: “it all comes back to the USA anyway (one way or another!).”

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Record Numbers Of Companies Drown In Debt To Pay Dividends To Their Private Equity Owners, by Tyler Durden

One day many of the practices described in this article will be illegal. From Tyler Durden at zerohedge.com:

One week ago we used Bloomberg data to report that in the latest Fed-fuelled bubble to sweep the market, now with Powell buying corporate bonds and ETFs, private equity firms were instructing their junk-rated portfolio companies to get even deeper in debt and issue secured loans, using the proceeds to pay dividends to owners: the same private equity companies. Specifically, we focused on five deals marketed at the start of the month to fund shareholder dividends, which accounting for half of the week’s volume, and the most in a week since 2017, according to Bloomberg.

Now, a little over a week late, the FT is also looking at these dividend recap deals which have become all the rage in the loan market in recent weeks, among other reasons because they are “ringing alarm bells since they come on top of already high leverage and weak investor protections and against a backdrop of economic uncertainty.”

Having updated our calculation, the FT finds that in September a quarter (24% to be exact) of all new money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4% over the past two years: that would be the highest proportion since the beginning of 2015, according to S&P Global Market Intelligence.

As we wrote a little over a week ago, while the loan market — where PE firms fund the companies they own by selling secured first, second, third and so on lien debt — had until recently not seen the same volume of issuance as other parts of the financial markets. That changed after the Fed stepped into the corporate bond market sending yields crashing to record lows, and forcing US investors into the last corner of the fixed income world to still offer some modest yields: leveraged loans. And since this is the domain of PE firms which desperately need to extract as much cash as they can from their melting ice cubes (another names for single-B and lower rated portfolio companies which will likely all be broke in the next 3-5 years), everyone is rushing to market with dividend recaps to pay as much to their equity sponsor as they can before the window is shut again.

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First CMBS Mega-Casualty On Deck: $700MM Starwood Portfolio On Verge Of Default, by Tyler Durden

A CMBS is a commercial mortgage backed security, a package of commercial mortgages. A big one will soon default, which is how credit crises get started. If this one doesn’t kick the crisis into high gear, another will, and soon. From Tyler Durden at zerohedge.com:

Over the past 6 months we have repeatedly discussed the plight of commercial real estate which unlike most other financial assets, failed to benefit from a Fed bailout or backstop (but that may soon change). It culminated in June when we wrote that the “Unprecedented Surge In New CMBS Delinquencies Heralds Commercial Real Estate Disaster.” The ongoing crisis in structured debt backed by commercial real estate in general and hotel properties in particular, prompted Wall Street to launch the Big Short 3.0 trade: betting against hotel-backed loans, which had the broadest representation in the CMBX 9 index, whose fulcrum BBB- series has continued to slide even as the broader market rebounded.

Yet while prominent failures within the CMBS universe had so far been rare due to overcollateralization of even highly distressed portfolios, as the economic slump drags on, as various stimulus measures expire and as landlords fail to make rent payment, the various embedded liquidity buffers have been rapidly draining and as a result we are now approaching the moment where one or more prominent names are about to suffer a spectacular blow up.

The first among them will almost certainly be the Starwood Retail Property Trust 2014-STAR, a portfolio which is backed by an almost $700 million defaulted loan which is collateralized by several malls – including The Mall at Wellington Green in Florida – owned by Barry Sternlich’s Starwood Capital, and whose investors are starting to take losses according to Bloomberg, after the Covid-19 pandemic shuttered stores, crippled rental payments and wiped out emergency cash reserves that had been keeping interest payments flowing.

A big reason for the devastation is that The Mall at Wellington Green, the core property of the portfolio and Wellington’s biggest taxpayer, saw its taxable value drop 32% in 2019 to $150 million as a result of the Nordstrom departure, according to the Palm Beach County Property Appraiser’s Office. Starwood Retail Partners bought the property in 2014 for $341.1 million, marking the largest real estate deal ever recorded in the county at the time. It is now worth less than half, and that’s before most of its other anchor clients also fled or filed for bankruptcy.

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China is killing the dollar, by Alasdair Macleod

If a country is clearly bent on depreciating its own currency, why hold either the currency or assets denominated in that currency. From Alasdair Macleod at goldmoney.com:

In the wake of the Fed’s promise of 23 March to print money without limit in order to rescue the covid-stricken US economy, China changed its policy of importing industrial materials to a more aggressive stance. In examining the rationale behind this move, this article concludes that while there are sound geopolitical reasons behind it the monetary effect will be to drive down the dollar’s purchasing power, and that this is already happening. More recently, a veiled threat has emerged that China could dump all her US Treasury and agency bonds if the relationship with America deteriorates further. This appears to be a cover for China to reduce her dollar exposure more aggressively. The consequences are a primal threat to the Fed’s policy of escalating monetary policy while maintaining the dollar’s status in the foreign exchanges.

Introduction

On 3 September, China’s state-owned Global Times, which acts as the government’s mouthpiece, ran a front-page article warning that

“China will gradually decrease its holdings of US debt to about $800billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict,” Xi Junyang, a professor at the Shanghai University of Finance and Economics told the Global Times on Thursday”[i].

Do not be misled by the attribution to a seemingly independent Chinese professor: it would not have been the frontpage article unless it was sanctioned by the Chinese government. While China has already taken the top off its US Treasury holdings, the announcement (for that is what it amounts to) that China is prepared to escalate the financial war against America is very serious. The message should be clear: China is prepared to collapse the US Treasury market. In the past, apologists for the US Government have said that China has no one to buy its entire holding. The most recent suggestion is that China’s Treasury holdings will be put in trust for covid victims — a suggestion if enacted would undermine foreign trust in the dollar and could bring its reserve role to a swift conclusion.[ii] For the moment these are peacetime musings. At a time of financial war, if China put her entire holding on the market Treasury yields would be driven up dramatically, unless someone like the Fed steps in to buy the lot.

If that happened China would then have almost a trillion dollars to sell, driving the dollar down against whatever the Chinese buy. And don’t think for a moment that if China was to dump its holding of US Treasuries other foreign holders would stand idly by. This action would probably end the dollar’s role as the world’s reserve currency with serious consequences for the US and global economies.

There is another possibility: China intends to sell all her US Treasuries anyway and is making American monetary policy her cover for doing so. It is this possibility we will now explore.

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Unspoken Truth, by Sven Henrich

The Fed has become the deity of the financial markets. From Sven Henrich at northmantrader.com:

We all know it yet the unspoken truth deserves to be said out aloud.

You all heard the phrases ‘Don’t fight the Fed’, and ‘ there is no alternative’. Can we be clear what these phrases really mean? They mean people are buying assets at prices they otherwise wouldn’t because a central planning committee is putting in market conditions that changes their market behavior.

People are paying forward multiples that are higher than they would if they earned higher interest income. The ‘desperate search for yield’ they call it. Think of it as a forced auction. You must pay, and you must pay more because you can’t bid on anything else and neither can anyone else hence there are now bidders for ever less available product (i.e. think shrinking share floats) driving prices wildly higher. And as central banks have become permanently dovish over the past decade Fed meetings are the principal impetus for rallies. Indeed most gains in markets come around days that have Fed Day written on them, a well established history going back decades now.

A fact the Fed itself is very well aware of:

“In a 2011 paper, New York Fed economists showed that from 1994 to 2011 almost all the S&P 500’s returns came in the 3 days around an FOMC decision. Over this period the index rose by 270%, and most of those gains happened the before, the day of, and the day after a Fed meeting.”

So Pavlovian has the response become that shorts automatically cover ahead of Fed meetings and investors buy ahead of Fed meetings expecting a positive response. The Fed is the market as it’s driving its entire behavior. The “Fed put” they call it. Another phrase that explicitly acknowledges that investors are orienting their risk profile behavior on what this unelected committee does.

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The 21st Century Is Marked By Crisis and Political Division, by Bill Bonner

We’re twenty percent into the 21st century and it hasn’t been a great start. From Bill Bonner at rogueeconomics.com:

Week 26 of the Quarantine

In this bright future, you can’t forget your past.

– Bob Marley

SAN MARTIN, ARGENTINA – What a colossal flop!

We’re talking about the 21st century. A failure in almost every way.

We now have 30 million people on unemployment – nearly 20% of the labor force.

We have a budget deficit of nearly 20% of GDP.

And, despite already spending $2 for every $1 they collect in taxes, the feds are planning to spend more.

We have phony “conservatives” waving the flag… and real radicals trying to tear it down. On both sides are more and more loonies, locked and loaded…

Even many of our own dear readers are ready to go to war with each other. This is from yesterday’s mailbag:

Hey Dude, we are at WAR! Trump leads the Win-the-War Party! The Neo Repubs are the “What? Me, worry?” Party. And you are like the pet dog nipping at the heels of the soldiers marching past!

No matter the cost, we must win the war against socialism and the Ds. There is time enough to purify ourselves after we win! If we lose, it will be a “thousand years” before our experiment is tried again… Meanwhile it is your obligation to support those who are fighting, regardless of technique and strategy… TRUMP!

Nasty Themes

It is hard to figure out how an administration that declares a moratorium on rent collection, stifles free trade, and runs a deficit of 20% of GDP could save us from socialism… But in this great 21st-century future, wonders never cease.

This week, in this “new normal,” we’ve been trying to remember what the “old normal” was like. And was it really better? Or is it just us?

We recalled what it must have been like when we were born. Of course, it was a very different world back then.

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Market Friday: Johnson’s Big Week on the Way to the COVID Gallows, by Tom Luongo

Like many politicians, Boris Johnson is capable of being clever and stupid at the same time. From Tom Luongo at tomluongo.me:

n the same week Prime Minister Boris Johnson blew up trade deal talks with the European Union he signs a big trade deal with Japan.

In the same week Boris Johnson unveils new, very unpopular social distancing rules barring gatherings of more than six people, he puts the screws to the Scottish Nationalists who still think their support comes from their being arch-Remainers and not the contrary nature of most Scots.

In the same week that Boris Johnson sets an October 15th drop dead date for Brexit talks with the EU, President Donald Trump’s election chances rose to even for the first time this summer.

In the same week Julian Assange goes through a sham trial for the sake of protecting the indefensible actions of U.S. and UK intelligence agents Johnson’s government is mulling scrapping the BBC’s mandatory licence fee handing them taxpayer money to undermine world security as the tip of the Marxist spear.

Now given all of that, it’s clear that Boris Johnson as Prime Minister is a decidedly mixed bag. His response to the Coronapocalypse has been an unmitigated disaster, bowing to political winds he should have never exposed himself to.

In doing so he’s squandered the significant goodwill his Brexit maneuvers of 2019 garnered him and the Conservative party. So, it’s obvious by now that his lack of managerial/organizational skill is what is undermining his government.

At the same time, however, Johnson’s handling of Brexit has been nothing short of excellent, the valid criticisms of the Withdrawal Act by Nigel Farage notwithstanding.

Johnson inherited a poison pill from Theresa May and in his zeal to fulfill a political promise agreed to a treaty with the EU that would bring his hardball negotiating stance to the current crossroads because of his compromises on the issue of Northern Ireland.

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Dear Jerry and James: You’re Both Wrong About New York, by Charles Hugh Smith

The merchants of debt took over New York and other cities after President Nixon cut the dollars link to anything real back in 1971. From Charles Hugh Smith at oftwominds.com:

The “system” known as a city, now bloated and overgrown by decades of mal-investment, will be forced to become self-supporting.

So let’s look at the urban exodus that’s exciting so much commentary. Two essays pin each end of the urban exodus spectrum: James Altucher’s NYC Is Dead Forever, Here’s Why focuses on the technological improvements in bandwidth that enable digital-economy types to work from anywhere, and the destabilizing threat of rising crime. In his telling, both will drive a long-term, accelerating urban exodus.

Jerry Seinfeld’s sharp rebuttal, So You Think New York Is ‘Dead’, focuses on the inherent greatness of NYC and other global metropolises based on their unique concentration of wealth, arts, creativity, entertainment, business, diversity, culture, signature neighborhoods, etc.

Today I’m publishing a guest essay on the topic by correspondent R.J.:

Dear Jerry and James: You’re Both Wrong About New York, And I doubt you’ll ever be able to see why.

Fifty years ago, cartoons of New York Mayor John Lindsay were splashed across the editorial pages of American media. Pockets emptied and with a comical expression, he was depicted as a pathetic beggar, hoping somebody, anybody would loan his city the money it desperately needed to continue paying its bills.

His challenge was reflected in just about every other major city, where commercial flight, infrastructure rot, and population loss was on-going and devastating to already corrupt civic finances.

Turned out cities weren’t selling what people wanted to buy. People wanted space, property, and autonomy—the supplies of which cities are specifically designed to restrict for their leader’s own personal aggrandizement. The unprecedented prosperity of the postwar years created a large American middle class with options.

And they opted to move out.

So the city’s economic model fell apart.

Yet twenty years later after John Lindsay went begging, most large cities were experiencing a civic renaissance–with investments in world-class infrastructure, an influx of youth and talent, and rates of population growth that would rival previous heydays.

Budgets were even being balanced.

What happened?

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Economic War With China Is The Final Step Before The “Great Reset”, by Brandon Smith

Can a trade, currency, and debt eruption with China lead to the new world order? From Brandon Smith at alt-market.com:

This article was written by Brandon Smith and originally published at Birch Gold Group

With the pandemic dominating the news cycle, the general public has been completely distracted from a much more important crisis; namely, the economic crisis. To be sure, economic decay is not as swift or exciting, but I doubt that’s why the mainstream media mostly ignores the issue. From my experience, the media tends to omit coverage of the things they don’t want the population to notice or think about.

Right now, the only word spoken on the economy is “recovery”. Of course, if you’ve been reading my recent articles, you know that the recovery narrative is nonsense. With the small business sector on the verge of collapse, the U.S. economy has no means to recover unless we see a sudden resurgence in industrial production and domestic factories built, and with corporate debt at historic highs, there’s simply no money for that right now. Good luck trying to bankroll a manufacturing renaissance in the middle of a stagflationary environment.

That’s not to say that the rest of the world is much better off, but the U.S. suffers from the added weight of its past financial and monetary “success”. Let me explain…

Recent generations have grown up conditioned to believe that, through the power of central bank fiat currency, all problems can be solved. There has even been a concerted effort within the media to support this lie. Remember when propaganda rags like The Atlantic claimed that central bankers like Ben Bernanke were “the real heroes” saving the economy?

That’s the narrative young adults and investors today have grown up with. Now, whether they believe it is another matter, but as we can see in the world of Robinhood stock trading, there has been little concern for the concept of “bubble markets”. These kids think that the party is eternal because they are backstopped by the Fed, and there’s a lot of shoe-shine boys in the media telling them they are right. However, what they are not being told is that we are in the middle of a collapse dynamic, and the structures they view as reliable are now crumbling.

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