Category Archives: Debtonomics

The “American Dream” is Over–and Voters Know It, by Charles Hugh Smith

From Charles Hugh Smith at oftwominds.com:

If the American Dream depends on skyrocketing debt built on a weakening foundation of stagnant productivity and income, then it is indeed over.

Despite a ceaseless propaganda campaign declaring all is well with the U.S. economy, the Status Quo is fragile–and voters know it. Not only do they know the economy–and their financial security–is one crisis away from meltdown, they’re also fed up with all the official gerrymandering of data to make the economy appear healthy.

The Economy Is Better — Why Don’t Voters Believe It?

The American Dream–characterized by plentiful jobs offering living wages, security and opportunities to get ahead–is over, and voters know this, too.People are realizing the U.S. economy has changed qualitatively in the past 20 years, and claims that it’s stronger then ever ring hollow to people outside Washington D.C., academic ivory-towers and ideologically driven think-tanks.

Many econo-gurus lay the blame for the Great Depression on the Federal Reserve tightening too soon, or not loosening credit enough, but this is nonsense: The Great Depression was the result of credit/borrowing (i.e. debt) outrunning the foundation that supports debt: productivity and income.

Piling more debt on a base that isn’t expanding fast enough to support skyrocketing debt leads to a collapse of the feebly supported debt: borrowers default, asset prices crash as buyers vanish and lenders go bankrupt as the assets held as collateral are repriced.

To continue reading: The “American Dream” is Over—and Voters Know It

Advertisements

What Deflation Quacks Like, by Raúl Ilargi Meijer

Deflation, like winter, is no longer coming; it’s here. From  Raúl Ilargi Meijer at theautomaticearth.com:

As yet another day of headlines shows, see the links and details in today’s Debt Rattle at the Automatic Earth, deflation is visible everywhere, from a 98% drop in EM debt issuance to junk bonds reporting the first loss since 2008 to corporate bonds downgrades to plummeting cattle prices in Kansas to China’s falling demand for iron ore and a whole list of other commodities.

The list is endless. It is absolutely everywhere. And it’s there every single day. But how would we know? After all, we’re being told incessantly that deflation equals falling consumer prices. And since these don’t fall -yet-, other than at the pump (something people seem to think is some freak accident), every Tom and Dick and Harry concludes there is no deflation.

But if you wait for consumer prices to fall to recognize deflationary forces, you’ll be way behind the curve. Always. Consumer prices won’t drop until we’re -very- well into deflation, and they will do so only at the moment when nary a soul can afford them anymore even at their new low levels.

The money supply, however it’s measured, may be soaring (Ambrose Evans-Pritchard makes the point every other day), but that makes no difference when spending falls as much as it does. And it does. The whole shebang is maxed out. And the whole caboodle is maxed out too. All of it except for central banks and other money printers.

Everyone has so much debt that spending can only come from borrowing more. Until it can’t. We read comments that tell us the global markets are reaching the end of the ‘credit cycle’, but can the insanity that has ‘saved’ the economy over the past 7 years truly be seen as a ‘cycle’, or is it perhaps instead just pure insanity? There’s never been so much debt on the planet, so unless we’re starting a whole new kind of cycle, not much about it looks cyclical.

Also, though we hear this all the time, the collapse in spending does not happen because people are ‘saving’, but we wouldn’t know that from the ‘official’ numbers, because when people pay down their debts, that is counted as ‘saving’.

To continue reading: What Deflation Quacks Like

“Distress” in US Corporate Debt Spikes to 2009 Level, by Wolf Richter

A word to the wise (which includes SLL readers) is sufficient: credit markets always get the joke before the stock market). They’ve been the canary in the coal mine for the last two equity bear markets. From Wolf Richter at wolfstreet.com:

Investors bloodied as the Credit Bubble implodes at the bottom

Investors, lured into the $1.8-trillion US junk-bond minefield by the Fed’s siren call to be fleeced by Wall Street and Corporate America, are now getting bloodied as these bonds are plunging.

Standard & Poor’s “distress ratio” for bonds, which started rising a year ago, reached 20.1% by the end of November, up from 19.1% in October. It was its worst level since September 2009.

It engulfed 228 companies at the end of November, with $180 billion of distressed debt, up from 225 companies in October with $166 billion of distressed debt, S&P Capital IQ reported.

Bonds are “distressed” when prices have dropped so low that yields are 1,000 basis points (10 percentage points) above Treasury yields. The “distress ratio” is the number of non-defaulted distressed junk-bond issues divided by the total number of junk-bond issues. Once bonds take the next step and default, they’re pulled out of the “distress ratio” and added to the “default rate.”

During the Financial Crisis, the distress ratio fluctuated between 14.6% and, as the report put it, a “staggering” 70%. So this can still get a lot worse.

The distress ratio of leveraged loans, defined as the percentage of performing loans trading below 80 cents on the dollar, has jumped to 6.6% in November, up from 5.7% in October, the highest since the panic of the euro debt crisis in November 2011.

The distress ratio, according to S&P Capital IQ, “indicates the level of risk the market has priced into the bonds. A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe, sustained market disruption.”

And the default rate, which lags the distress ratio by about eight to nine months – it was 1.4% in July, 2014 – has been rising relentlessly. It hit 2.5% in September, 2.7% in October, and 2.8% on November 30.

To continue reading: “Distress” in US Corporate Debt Spikes to 2009 Level

Housing Bubble 2 in One Chart, by Charles Hugh Smith

From Charles Hugh Smith at oftwominds.com:

Now the gap between real house prices and real earnings is even wider than it was in Housing Bubble 1.

We know two things about housing bubbles: they always pop, with devastating consequences, and apologists and pundits always deny housing is in a bubble.And so it is no surprise that here we are in Housing Bubble 2, the second housing bubble of the 21st century, and the usual suspects are denying housing is in a bubble.

Courtesy of longtime correspondent B.C., we have a chart that not only identifies housing bubbles but explains why they inevitably collapse.

I know this will come as a great shock to apologists and pundits who have never seen a bubble until it has imploded, but the income of buyers actually matters in housing.

We have become so accustomed to housing being propped up with 3% down-payment FHA loans, foreign buyers paying with cash and Fed-favored financiers buying 10,000 homes to rent to former homeowners that we tend to forget that in the longer term, housing sales depend on buyers with enough income to pay the mortgage, property taxes, repairs, etc.

To continue reading: Housing Bubble 2 in One Chart

Europe Is Toast, by Robert Gore

The United Nations Climate Change Conference (UNCCC) will someday be regarded as the spire placed atop a towering edifice of mendacity and hubris. It will momentarily reward the vanity of those who built it, but it will seem as out of place with the time and events that followed as the newly constructed Empire State Building must have seemed to New Yorkers during the depths of the Great Depression. While the aspirational quality of the Empire State Building was incongruous with the bleak Depression, at least that building contributed, and continues to contribute, to human well-being, and its soaring lines remains aspirational. The figurative UNCCC tower is like the Dark Tower in Lord of the Rings, an obsidian monument to the nether regions of the human soul, erected on a foundation that will eventually crumble.

It is ironic that the UNCCC is being held in Paris, a font of European civilization, a little over two weeks after terrorists plunged the city into chaos and bloodshed. Participants will congratulate themselves for—among many self-evident virtues—their intrepid refusal to submit to fear, neither canceling nor moving the conference, thus denying terrorism a symbolic victory. Only a curmudgeon would point out the incongruity: a gathering of egos and powers who believe they can control the world and its climate contrasted to the recent carnage, yet another demonstration of their impotence.

The command and control paradigm is being stretched to its breaking point everywhere, no place more than Europe. The continent’s intellectual elite has always looked with condescension on the American “fetish” for individual rights and liberty. Europe is the birthplace of Marxism, welfare-statism, National Socialism, Fascism, and Keynesianism. Whatever the “free trade zone” rhetoric that attended the establishment of the European Union, it was envisioned by its originators as the gateway to pan-European supranational governance.

After World War II, Europe’s non-Warsaw Pact nations made a Faustian bargain: under NATO they would outsource their defense to the US, but give up much of their autonomy in foreign and military affairs. With minimal defense spending, the European nations funded lavish welfare states. Economies were extensively regulated by national governments, and the European Union evolved into another set of bureaucrats promulgating rules. Labor regulations are particularly stultifying, making it difficult and expensive for companies to reorganize, close money-losing operations, and fire unnecessary or unproductive workers. Trend growth rates in Europe have been below those of the US and Asia. Notwithstanding the implicit US defense subsidy, many European nations run deficits and their ratios of debt to GDP have steadily climbed.

Most European nations have played a subsidiary role in the US’s war on terror. Even those that have refused to join the US have not publicly opposed it. Unfortunately for Europe, its history—from the Crusades to its acquiescence to US intervention—puts it in Islamist crosshairs. Hatred of Europe runs as deep as hatred of the US, with a special animus for the French, British, and Russians. They carved up the region for their own advantage after World War I and share a legacy of colonialism and backing corrupt puppet regimes.

Even before the latest refugee influx, many European nations had substantial Islamic populations. The percentages will inexorably grow; Muslims have far higher birthrates than native Europeans. The debt burdens, regulatory strangulation, and welfare state benefits that have driven youth unemployment rates above 50 percent in some countries have also kept many Muslims, young and old, out of the labor force, on the dole, and living in ghettos. This is not a recipe for satisfaction. Resentment has been magnified by the tendency of many of the migrants to reject assimilation and to embrace violent and often apocalyptic Islamic ideologies. The swelling flood of refugees fleeing lands that have been made uninhabitable by war and chaos stoked by US and Europe intervention, some attracted by welfare state benefits, some vowing jihad, throws nitroglycerin on the fire.

Leaders of countries who are—confronted with slow-to-no-growth economies plagued by debt, unemployment, regulatory overkill, and unaffordable benefits; playing host to hundreds of thousands of Muslim refugees joining combustible local Muslim populations and placing further demands on already strained-to-the-breaking-point immigration, police (not all of the immigrants are law-abiding), and social services; faced with the understandable and increasingly virulent backlash all this engenders—will somehow solve the problem of global climate change, a problem for which it has not been established that humanity is the cause nor that it can be the solution. Sure they will. Long before the polar ice caps melt, coastal regions submerge, and equatorial regions become uninhabitable frying pans—if any of these things ever occur—the continent as we know it will collapse. Europe is toast.

These so-called leaders have met the looming disasters (and there will be a multiplicity) with politically correct gobbledygook orchestrated by the continent’s preeminence, Angela Merkel. Big-hearted Europe can open its borders and wallets to the refugees. (It can’t; it’s bankrupt and there are millions more coming.) They’re here to work, not soak up benefits. (Some are, but even those who want to work find it tough sledding in Europe’s sclerotic economies.) They are refugees, not terrorists (True of many, but not all, and it only took a few to wreak havoc in Paris. One does not have to accept Matthew Bracken’s nightmare scenario to concede that an appreciable percentage of refugees pose a danger.) In the long run, they will assimilate and become part of Europe’s rich and diverse culture. (Who knows? In the short run, thugs among them are robbing, beating, raping, murdering, and otherwise terrorizing local populations.)

Europe has no monopoly on hubris, ideology-induced myopia, and grandiose visions detached from reality. The American representative at the UNCCC is, after all, Barack Obama. While an ocean physically separates Europe and America, they are next-door neighbors philosophically. The US is following European footsteps: intervening in the Middle East and its historic enmities and conflicts, inserting itself in myriad unsavory machinations and intrigues, and establishing ostensible puppets that invariably end up pulling the strings of their supposed puppet masters. The US marches down Europe’s ruinous economic path as well.

There is a point of no return, when the consequences of actions taken pursuant to fallacy, pretension, and venality overwhelm those who have taken them. Europe has passed that point—its fate is sealed—and fences, walls, lock downs, identity cards, surveillance, segregation, deportation, and military retaliation will not shut the Pandora’s box of evils it has opened on itself. There is no assurance that if the US leaves the Middle East and Northern Africa the flow of refugees will abate or the threat of terrorism diminish, although those outcomes are quite plausible. However, the status quo guarantees escalation, and guarantees that the US will eventually share Europe’s fate.

WHY SETTLE FOR LESS?

TGP_photo 2 FB

AMAZON

KINDLE

NOOK

The Lull Before The Storm—–It’s Getting Narrow At The Top, Part 2, by David Stockman

From David Stockman at davidstockmanscontracorner.com:

The danger lurking in the risk asset markets was succinctly captured by MarketWatch’s post on overnight action in Asia. The latter proved once again that the casino gamblers are incapable of recognizing the on-rushing train of global recession because they have become addicted to “stimulus” as a way of life:

Shares in Hong Kong led a rally across most of Asia Tuesday, on expectations for more stimulus from Chinese authorities, specifically in the property sector…….The gains follow fresh readings on China’s economy, which showed further signs of slowdown in manufacturing data released Tuesday (which) remains plagued by overcapacity, falling prices and weak demand. The dimming view casts doubt that the world’s second-largest economy can achieve its target growth of around 7% for the year. The central bank has cut interest rates six times since last November.

More stimulus from China? Now that’s a true absurdity—-not because the desperate suzerains of red capitalism in Beijing won’t try it, but because it can’t possibly enhance the earnings capacity of either Chinese companies or the international equities.

In fact, it is plain as day that China has reached “peak debt”. Additional borrowing there will not only prolong the Ponzi and thereby exacerbate the eventual crash, but won’t even do much in the short-run to brake the current downward economic spiral.

That’s because China is so saturated with debt that still lower interest rates or further reduction of bank reserve requirements would amount to pushing on an exceedingly limp credit string.

To continue reading: The Lull Before The Storm, Part 2

The Lull Before The Storm—–An Ideal Chance To Exit the Casino, Part 1, by David Stockman

From David Stockman at davidstockmanscontracorner.com:

Last night’s Asian action brought another warning that the global deflation cycle is accelerating. Iron ore broke below $40 per ton for the first time since the central banks kicked off the world’s credit based growth binge two decades ago; it’s now down 40% this year and 80% from its 2011-212 peak.

As the man said, however, you ain’t seen nothin’ yet. That’s because the above chart is not merely reflective of too much supply and capacity growth enthusiasm in the iron ore industry or even some kind of worldwide commodity super-cycle that has gone bust.

Instead, the iron ore implosion is symptomatic of a much deeper and more destructive malady. Namely, it reflects the monumental malinvestment generated by two decades of rampant credit expansion and falsification of debt and equity prices by the world’s convoy of money printing central banks.

Since 1994 the aggregate balance sheet of the world’s central banks has expanded by 10X—— rising from $2.1 trillion to $21 trillion over the period. This rise does not measure any kind of ordinary trend which temporarily got out of hand; it represents an outbreak of monetary insanity that is something totally new under the sun.

What it means is that the Fed, ECB, BOJ, People’s Bank of China (PBOC) and the manifold lesser central banks purchased $19 trillion of government bonds, corporate debt, ETFs and even individual equities and paid for it by hitting the electronic “print” button on their respective financial ledgers.

This central bank balance sheet expansion, in fact, represented 70% of the world’s entire GDP as of the time the print-fest began in 1994. Yet as an accounting matter this monumental expansion was inherently suspect .

That’s because the asset side was mushroomed by the acquisition of already existing assets——-financial claims which had originally funded the purchase of real goods and services.

By contrast, the equal and opposite liability side expansion consisted of newly bottled monetary credit conjured from thin air; it represented nothing of tangible value, and most especially not savings obtained from the prior production of real economic output.

To continue reading: The Lull Before The Storm