Category Archives: Debt

Eurozone Whistles Past its Biggest Threat, by Don Quijones

The Italian financial system is in deep trouble and will crash without a large infusion of funds, undoubtedly from Europe’s beleaguered taxpayers. From Don Quijones at wolfstreet.com:

 

Italy’s Multi-Headed Hydra Predicament.

For the last three years, the political establishment in Italy and beyond have had a field day attacking, ridiculing, and vilifying Beppe Grillo’s 5-star movement. Europe’s media have tarred him with the brush of populism. In 2013 The Economist labelled him a clown on its front cover. Yet his party still leads the polls. And that lead is growing.

A new Ipsos poll in Corriere della Sera newspaper has put Beppe Grillo’s 5-Star Movement on 32.3% – its highest ever reading. It placed 5.5 points ahead of the governing PD, on 26.8%, after the PD dropped more than three percentage points in a month, as former prime minister Matteo Renzi battles to reassert his authority following a walkout by a left-wing faction.

Internal political battles are nothing new in Italy. The country enjoys a hard-earned reputation for political instability and paralysis, having seen 63 governments come and go since 1945. The problem this time around is that internal weakness and strife in Italy’s traditional center-left and center-right parties could end up gifting the next election to a party that refuses to play by the book.

If it wins the next elections, which could be brought forward to as early as June this year, 5-Star Movement has pledged to hold a referendum of its own — albeit a non-binding one — on Italy’s membership of the euro. As polls have shown, there is much broader public apathy toward the single currency than in just about any other euro zone nation. Grillo’s plan could also receive the backing of former prime minister Silvio Berlusconi who is determined to pull off a political comeback and is talking of restoring the Italian Lira.

As Reuters reports, such a scenario could spook financial markets “wary of both the 5-Star’s euroskepticism and the threat of prolonged political instability in Italy,” which boasts a public debt burden of over €2 trillion (133% of GDP). In any normal situation that would be a problem. But Italy is not in a normal situation; it is on the cusp of a potentially very large financial crisis that, if mishandled, could bring down Europe’s entire financial system.

To continue reading: Eurozone Whistles Past its Biggest Threat

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Watch These Geopolitical Flashpoints Carefully, by Brandon Smith

Brandon Smith highlights the dangers ahead. From Smith at alt-market.com:

Anyone who has been involved in alternative geopolitical and economic analysis for a decent length of time understands that the establishment power structure thrives according to its ability to either exploit natural crises, or to engineer fabricated crises.

This is not that hard to comprehend, but for some reason there are a lot of people out there who simply assume that global sea-change events just happen “at random,” that the elites are stupid or oblivious, and that all outcomes are a matter of random chance rather than being directed or manipulated. I call these people “intellectual idiots,” because they believe they are applying logic to every scenario but they are sabotaged by an inherent bias which causes them to deny the potential for “conspiracy.”

To clarify, their logic folds in on itself and becomes faulty. They believe themselves objective, but they abandon objectivity when they staunchly refuse to consider the possibility of covert influence by organized special interests. When you internally dismiss the possibility of a thing, no amount of evidence will ever convince you of its reality. This is how the “smartest” people in the room can end up being the dumbest people in the room.

In the survivalist community there is a philosophy – there is no such thing as a crisis for those who are prepared. This is true for prepared individuals as much as it is true for prepared communities and prepared nations. The only way a society can fall is when it becomes willfully ignorant of potential outcomes and refuses to organize against them.

By extension, it would make sense that by being prepared for a particular crisis or outcome an individual or group could not only survive, but also profit. It is not crazy or outlandish to entertain the idea that there are groups in power (perhaps for many generations) that aggressively seek to predict or even force particular outcomes in geopolitics for their own profit. And, by profit, I do not necessarily mean material wealth. In many cases, the power of influence and psychological sway over the masses might be considered a far greater prize than money or property.

To continue reading: Watch These Geopolitical Flashpoints Carefully

This new bubble is even bigger than the subprime fiasco, by Simon Black

There are now more student loans outstanding than there were subprime loans at the height of the housing bubble. And just like those subprime loans, student loan repayment rates are faltering. From Simon Black at internationalman.com:

In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond.

The idea was revolutionary.

The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors.

The idea caught on, and pretty soon, everyone was doing it.

As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s.

Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them.

FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.

Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist.

But it didn’t take very long for the madness to start again.

By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned.

Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny.

It was madness.

By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number.

And of course, we know what happened the next year: the entire financial system came crashing down.

Duh. It turned out that making $1.3 trillion worth of idiotic loans wasn’t such a good idea.

By 2009, 50% of those subprime mortgages were “underwater”, meaning that borrowers owed more money on the mortgage than the home was worth.

To continue reading: This new bubble is even bigger than the subprime fiasco

 

The ‘Retail Apocalypse’ Is Officially Descending upon America, by Carey Wedler

The hits just keep on coming on the retail front. From Carey Wedler at theantimedia.org:

Consumerism has long been a defining element of American society, but retail giants are now shutting down thousands of their locations amid a long-anticipated “retail apocalypse,” as Business Insider describes it.

The outlet reports that over the next couple months, more than 3,500 stores are expected to close:

“Department stores like JCPenney, Macy’s, Sears, and Kmart are among the companies shutting down stores, along with middle-of-the-mall chains like Crocs, BCBG, Abercrombie & Fitch, and Guess.”

Some stores, like Bebe and The Limited, are closing all of their locations to focus more on online sales. Other larger chains, like JC Penney, are “aggressively paring down their store counts to unload unprofitable locations and try to staunch losses,” Business Insider notes. Sears and K-Mart are following a similar trajectory moving forward.

Sears is shutting down 150 Sears and Kmart locations, about 10% of their shops. JCPenney is shutting down 138 stores, about 14% of their total locations.

These closures are the consequence of several different factors. First, the United States has more shopping mall square footage per person than other parts of the world. In America, retailers reserve 23.5 square feet per person; in Canada and Australia, the countries with the second- and third-most space have 16.4 and 11.1, respectively.

Another reason retail brick and mortars are failing is the growth of e-commerce. Between 2010 and 2013, visits to shopping malls declined 50%, according to data from real estate research firm Cushman and Wakefield. Meanwhile, online sales from huge online outposts, like Amazon, have exploded.

To continue reading: The ‘Retail Apocalypse’ Is Officially Descending upon America

Commercial and Residential Real-Estate Bubble once again a Risk to “Financial Stability,” and Fed’s Rosengren is Worried, by Wolf Richter

Another bubble that’s starting to leak. From Wolf Richter at wolfstreet.com:

The Fed caused it, but it won’t do much to contain it.

Last year, Boston Fed President Eric Rosengren — considered a “dove” on the Fed’s policy-setting committee — started warning about the commercial real-estate bubble in the US and what its demise could do to banks. But in his speech on Financial Stability on March 22 in Indonesia, he added what I’ve come to call “Housing Bubble 2” to his ever more emphatic concerns.

Like all central bankers, he can’t warn publicly about an approaching problem because it could trigger the very problem he’d be warning about. In this manner, no one at the Fed saw the last bust coming. So Rosengren started out his presentation, “Financial Stability: The Role of Real Estate Values” – by clarifying this: “First, I am not here today to predict problems, but rather to suggest we continue working to head them off.

The phrase, “continue working to head them off,” is ironic because he also pointed out what has caused these problems: “very low interest rates” that were “wholly necessary” and that he “strongly supported.”

But the risks are massive.

Rosengren finds that “the root cause of the financial crisis was a significant decline in collateral values of residential and commercial real estate” and “exposures across the banking system that are correlated and sizeable.”

Real estate becomes a trigger for a financial crisis because of its high leverage. For banks, these properties are collateral. When property values tank, the collateral is impaired. Defaults rise. Then broader problems spread into the economy. Property owners experience a reduction in income. Homeowners see their paper wealth evaporate and financial stress rises. At some point, banks begin to fail.

To continue reading: Commercial and Residential Real-Estate Bubble once again a Risk to “Financial Stability

Nine years later, Greece is still in a debt crisis… by Simon Black

The debt noose is starting to cinch. From Simon Black at internationalman.com:

Sometimes you have to marvel at the absurdity of the financial universe in which we live.

On one side of the Atlantic, we have the United States of America, which triggered yet another debt ceiling disaster last Thursday when the US government’s maximum allowable debt reset to just over $20 trillion.

Of course, the US national debt is pretty much already at $20 trillion.

(That’s roughly $166,000 per taxpayer in the Land of the Free.)

This means that Uncle Sam is legally prohibited from ‘officially’ borrowing any more money.

But far be it from the US government to start living within its means. Sacrilege!

These guys have zero chance of making ends meet without going into debt.

Just last year, according to the government’s own financial report, their annual net loss totaled $1 TRILLION, and the national debt increased by $1.4 trillion.

And that was in a relatively stable year. There was no major war or financial crisis to fight. It was just business as usual.

This year isn’t going to be any different.

So, cut off from their normal debt supply (the bond market), the Treasury Department is resorting to what they call “extraordinary measures.”

They’re basically pillaging government employee retirement funds, and will continue to do so until Congress raises the debt ceiling.

It’s a repeat of what happened in 2015. And 2013. And 2011.

Pretty amazing to consider that the “richest” country in the world has to plunder retirement funds in order to keep the lights on.

Former US Treasury Secretary Larry Summers said it perfectly when he quipped “How long can the world’s biggest borrower remain the world’s biggest power?”

Then, of course, on the other side of the Atlantic, we have Greece, which is now in its NINTH YEAR of a major debt crisis.

Incredible.

Greece has had nine different governments since 2009. At least thirteen austerity measures. Multiple bailouts. Severe capital controls. And a full-out debt restructuring in which creditors accepted a 50% loss.

Yet despite all these measures GREECE IS STILL IN A DEBT CRISIS.

To continue reading: Nine years later, Greece is still in a debt crisis…

Is this the Sound of the Bottom Falling Out of the Auto Industry? by Wolf Richter

Used car prices are falling, which for a variety of reasons is not good for the auto industry. From Wolf Richter at wolfstreet.com:

Not quite, not yet, but it’s not good either.

Let’s hope that the problems piling up in the used vehicle market — and their impact on new vehicle sales, automakers, $1.1 trillion in auto loans, and auto lenders — is just a blip, something caused by what has been getting blamed by just about everyone now: the delayed tax refunds.

In its March report, the National Association of Auto Dealers (NADA) reported an anomaly: dropping used vehicle prices in February, which occurred only for the second time in the past 20 years. It was a big one: Its Used Car Guide’s seasonally adjusted used vehicle price index plunged 3.8% from January, “by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble.”

The index has now dropped eight months in a row and hit the lowest level since September 2010. The index is down 8% year over year, and down 13% from its peak in 2014.

The price decline spanned all segments, but it hit the two ends of the spectrum — subcompact cars and the luxury end — particularly hard. The list shows the change in wholesale prices from January to February in vehicles up to eight years old:

NADA blamed three factors:

The surge in new vehicle incentive spending. Automakers, drowning in unsold inventories on dealer lots and desperate to move the iron and keep their plants running, increased incentive spending by 18% to the highest level in over a decade. This made new vehicle more competitive with late-model used vehicles. So this would be on the demand side.

The growing flood of used vehicles going through auction. Over the first two months this year, volume of vehicles up to eight years old rose by about 5% year-over-year. Volume of late-model vehicles – the supply from rental car companies and lease turn-ins – jumped 10%. So that’s on the supply side.

To continue reading: Is this the Sound of the Bottom Falling Out of the Auto Industry?