Category Archives: Economy

Oops, this Wasn’t Supposed to Occur in a Rosy Credit Scenario, by Wolf Richter

Generally credit expands in a healthy economy. Credit is contracting now. From Wolf Richter at wolfstreet.com:

It’s always associated with a recession: last time, the Financial Crisis.

Over the past five decades, each time commercial and industrial loan balances at US banks shrank or stalled as companies cut back or as banks tightened their lending standards in reaction to the economy they found themselves in, a recession was either already in progress or would start soon. There has been no exception since the 1960s. Last time this happened was during the Financial Crisis.

Now it’s happening again – with a 1990/91 recession twist.

Commercial and industrial loans outstanding fell to $2.095 trillion on May 10, according to the Fed’s Board of Governors weekly report on Friday. That’s down 4.5% from the peak on November 16, 2016. It’s below the level of outstanding C&I loans on October 19. And it marks the 30th week in a row of no growth in C&I loans.

Based on the Fed’s monthly reports, C&I loans outstanding at the end of April, at $2.095 trillion, were down a smidgen from October’s $2.098 trillion and were down 4.3% from the peak in November. This marks the seventh month in a row of no growth in loans.

This chart shows C&I loans outstanding at all US banks going back to 2012. Note how that 30-week stagnation-period is unique in this time span:

Since the Financial Crisis, the mantra has been: credit growth no matter what. Businesses have been exhorted to borrow, money has been cheap, and borrow they did. There have been periods of four or five weeks of stalling C&I loan growth, only to be succeeded by a vigorous surge. But after ballooning in this manner for six years straight, C&I loans have now languished for 30 weeks. And it’s not the oil bust; banks are lending to the oil patch again.

To continue reading: Oops, this Wasn’t Supposed to Occur in a Rosy Credit Scenario

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ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency, by Don Quijones

An Italian banking system collapse still in one of the favorites for the catalyst that kicks of the next global debt crisis. From Don Quijones at wolfstreet.com:

The only other option: “Orderly restructuring.”

Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.

But now there’s a snag.

Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At €4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP. The ECB has already reduced the rate of purchases to €60 billion a month. And it plans to further withdraw from the super-expansionary monetary policy. To do this, according to Der Spiegel, it wants to spread more optimistic messages about the economic situation and gradually reduce borrowing.

Frantically sowing the seeds of optimism on Wednesday was Bruegel’s Francesco Papadia, formerly director general for market operations at the ECB. “On the economic front, things are moving in the right direction,” he told Bloomberg. The ECB will begin sending clear messages in the Fall that it will soon begin tapering QE, Papadia forecast. By the halfway point of 2018 the ECB would have completed tapering and it would then use the second half of the year to move away from negative interest rates.

So far, most current ECB members have shown scant enthusiasm for withdrawing the punch bowl. The reason most frequently cited for not tapering more just yet is their lingering concern about the long-term sustainability of the Eurozone’s recent economic turnaround.

To continue reading: ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency

 

The Soft Underbelly of Scandinavian “High-Tax Happy-Capitalism”, by Charles Hugh Smith

With enough debt, anyone can be happy…for a while. From Charles Hugh Smith at oftwominds.com:

Central planning based on central-bank inflated debt-asset bubbles works until it doesn’t.
A media mini-industry touts Scandinavia’s “happiness” as the result of its high-tax, generous welfare state-capitalism. This mini-industry conveniently fails to report the soft underbelly of Scandinavia’s “High-Tax Happy-Capitalism”: The high-tax, generous welfare model is just as dependent on unsustainable credit bubbles as every other version of state-capitalism.
The glossy surface story goes like this: state-capitalism creates a happy, secure society if taxes are high enough to fund generous social welfare benefits for everyone. People are happy to pay the higher taxes because they value the generous benefits they receive.
The story has an implicit message: every state-capitalist society could become happy if only taxes were raised high enough to fund generous social welfare for all. There are many versions of this narrative, for example, the appealing (but financially impractical) “tax the robots” funded Universal Basic Income (UBI) that I have repeatedly debunked.
Put another way: state-managed capitalism works just great if high earners and companies pay high enough taxes to fund a rebalancing of wealth and income via social welfare transfers.
The reality is quite different from this glossy PR narrative. The Scandinavian economies have pursued the same unsustainable debt-bubble “fix” for their structural insolvency as other state-managed nations.
As the charts below reveal, the “happy” Scandinavian nations are now dependent on unprecedented debt/housing bubbles inflated by extreme monetary stimulus. The script is the same as in every other monetary “experiment” intended to create the illusion of solvency in an insolvent system: lower interest rates to zero (or below-zero if you’re really desperate), juice the financial system with liquidity/ easy credit, and base your measures of financial “health” on housing bubbles and other debt-based gimmicks. (Charts courtesy of the Acting Man blog)

Brick-and-Mortar Meltdown No Problem: Online Retail Startups Shift into Brick-and-Mortar, by Wolf Richter

Online or bricks-and-mortar, it’s getting harder and harder for retailers to make a buck. From Wolf Richter at wolfstreet.com:

With a tinge of bitter irony and perhaps desperation.

Mattress startup Casper Sleep Inc. is going to disrupt, again. Brick-and-mortar retailers are melting down. Today, clothing store rue21 filed for bankruptcy, shuttering 400+ of its nearly 1,200 stores. A slew of brick-and-mortar retailers announced a similar fate this year. To survive, they’re trying to carve out their niche online. But online retail is tough. And online-only retail startups too are finding out that it’s tough, and now they seek salvation in, well, brick-and-mortar retail.

“You have to start with digital,” Philip Krim, CEO and co-founder of Casper, told the Wall Street Journal. But once the brands is better known, “offline distribution – that’s where you’re really able to get a lot of scale,” he said, apparently oblivious of the meltdown.

Casper’s primary product is a foam mattress, sold online, and shipped in condensed form directly to a bedroom near you. Its revenue reached about $200 million in 2016, up from $100 million in 2015, Krim told the Journal, which added: “Casper raised prices on its mattresses in January to $950 from $850 for a queen, saying it made improvements that justify the higher cost.”

But a snag has cropped up. “Casper is finding it can no longer shun the storefront.” So it made a deal with Target.

Target expects in June to put Casper’s products [pillows, sheets, and other accessories] at the end of rows, a high-profile area, and 35 stores are scheduled to have a larger display with a Casper mattress to try out.

Target, which said the deal came together after about a year of talks, doesn’t yet sell mattresses in stores…. But Casper said it would become the exclusive mattress of Target.com and is discussing the possibility of bringing the bed into stores.

For three years, Casper has “lured customers through Facebook ads and podcast sponsorships,” as the WSJ put it. “It plastered New York subways with posters featuring cute cartoons, sponsored podcasts and flooded Facebook and Instagram with ads.”

To continue reading: Brick-and-Mortar Meltdown No Problem: Online Retail Startups Shift into Brick-and-Mortar

State of Denial: The Economy No Longer Works As It Did in the Past, by Charles Hugh Smith

As a general rule, the less a government involves itself with an economy, the better the economy does. The opposite is also true, and the US economy the last twenty years is living proof. From Charles Hugh Smith at oftwominds.com:

There’s no Plan B for a state-corporate form of central-planning capitalism that is no longer functioning.
If there is one reality that is denied or obscured by the Status Quo, it is that the economy no longer works as it did in the past. This is the fundamental economic context of our current slide into political-social disintegration.
The Status Quo narrative is: the policies that worked for the past 70 years are still working today. Boiled down to its Keynesian state-corporate essence, the Status Quo economic narrative is simple:
All we need to do to escape a “soft patch” (recession) is for governments to borrow and spend more money to temporarily boost incomes and demand until the private sector gets back on its feet and starts borrowing and spending more.
To help the private sector, central banks lower interest rates so it’s cheaper to borrow and spend.
As soon as the private-sector borrowing and spending rises, we can raise interest rates and trim state fiscal stimulus (i.e. governments borrowing and spending trillions more than they did before the recession).
But the inconvenient reality is these Keynesian policies no longer work. Fiscal stimulus (governments borrowing and spending trillions more than they did before the recession) has continued for a decade–or in Japan’s case, almost three decades.
The Keynesian gods have failed, but the worshippers of these false idols have no other form of black magic to turn to.
Why is fiscal stimulus now a permanent policy? The answer is uncomfortable: if fiscal stimulus is withdrawn (or even trimmed), the economy immediately goes into a self-reinforcing contraction.
As for near-zero interest rates: after 10 years of supposed “recovery,” central banks are terrified of pushing rates higher by quarter-point baby-steps, for the same reason that fiscal stimulus cannot be withdrawn: raising interest rates to historic norms would immediately send the economy into contraction.

Scandal At China’s Grand Silk Road Summit As India Skips, Warns Of “Unsustainable Debt”, by Tyler Durden

There are going to be bumps in the road, especially a road as grand as China’s envisioned New Silk Road. From Tyler Durden at zerohedge.com:

It was supposed to be China’s day of celebrating massive infrastructure spending for the sake of spending (read ghost towns, only now outside China’s borders) as Xi Jinping pledged $124 billion on Sunday for his new Silk Road plan to forge “a path of peace, inclusiveness and free trade” while calling for the abandonment of old models based on rivalry and diplomatic power games. However, it did not go quite as smoothly as expected.

A celebration years in the making, Xi hosted dozens of world leaders – including a piano-playing Vladimir Putin – on Sunday for the country’s biggest diplomatic showcase of the year, touting his vision of a new “Silk Road” that opens trade routes across the globe. Xi used the summit to “bolster China’s global leadership ambitions” as U.S. President Donald Trump promotes “America First” and questions existing global free trade deals.

After scoring 2 hat tricks in Sochi, Putin returns to Moscow where he places 1st in annual Van Cliburn competition

11:19 AM – 14 May 2017

In total, leaders from 29 countries attended the forum, including some of China’s close allies and partners such as Russian President Vladimir Putin, Cambodian Prime Minister Hun Sen, Kazakh President Nursultan Nazarbayev, Turkey’s quasi-dictator Tayyip Erdogan, as well as the heads of the United Nations, and the CapEx leeches from the IMF and World Bank.

“We should build an open platform of cooperation and uphold and grow an open world economy,” China’s president Xi told the opening of the two-day gathering in Beijing.

 

It’s Really Crazy What This ECB Has Wrought, by Wolf Richter

Europe is a borrower’s paradise and a saver’s hell. From Wolf Richter at wolfstreet.com:

In the land of NIRP refugees and “Reverse Yankees,” who will get crushed?

At the end of the week, something special happened, something totally absurd but part of the new normal: the average yield of euro-denominated junk bonds – the riskiest, non-investment-grade corporate bonds – dropped to the lowest level ever: 2.77%.

April 26 had marked another propitious date in the annals of the ECB’s negative yield absurdity: the average euro-denominated junk bond yield had dropped below 3% for the first time ever.

By comparison, what is considered the most liquid and save debt, the 10-year US Treasury, carries a yield of 2.33%; the 30-year Treasury yield hovers at 3%.

This chart of the BofA Merrill Lynch Euro High Yield Index (data via FRED, St. Louis Fed), shows just how crazy this has gotten in the Eurozone:

It’s not like there’s deflation in the Eurozone, despite rampant scaremongering about it. The official inflation rate in April was 1.9% for the 12-month period. As this chart shows, it’s not likely to go away any time soon (via Trading Economics):

In other words, the average “real” junk bond yield (after inflation) according to the above two indices is now 0.87%. That’s the return bond-buyers get as compensation for handing their money for years to come to non-investment grade corporations – as per an average of the ratings by Moody’s, S&P, and Fitch – with an appreciable risks of default looming on the horizon.

Issuing junk bonds in euros is not just the prerogative of European companies. It includes issuance of junk-rated US companies that seek out this cheap money. “Reverse Yankees,” as these bonds are called, have become a large factor in euro-bond issuance.

And investors that accept a “real” compensation of only 0.87% per year to deal with these risks – have they gone nuts? You bet.

To continue reading: It’s Really Crazy What This ECB Has Wrought