Tag Archives: Credit

11 Reasons Why U.S. Economic Growth Is The Worst That It Has Been In 3 Years, by Michael Snyder

SLL has never met a tax cut it didn’t like, but it’s going to take more than tax cuts to propel an economy that’s cruising below stall speed and losing altitude. From Michael Snyder at theconomiccollapseblog.com:

Those that were predicting that the U.S. economy would be flying high by now have been proven wrong.  U.S. GDP grew at the worst rate in three years during the first quarter of 2017, and many are wondering if this is the beginning of a major economic slowdown.  Of course when we are dealing with the official numbers that the federal government puts out, it is important to acknowledge that they are highly manipulated.  There are many that have correctly pointed out to me that if the numbers were not being doctored that they would show that we are still in a recession.  In fact, John Williams of shadowstats.com has shown that if honest numbers were being used that U.S. GDP growth would have been consistently negative going all the way back to 2005.  So I definitely don’t have any argument with those that claim that we are actually in a recession right now.  But even if we take the official numbers that the federal government puts out at face value, they are definitely very ugly

Economic growth slowed in the first quarter to its slowest pace in three years as sluggish consumer spending and business stockpiling offset solid business investment. Many economists write off the weak performance as a byproduct of temporary blips and expect healthy growth in 2017.

The nation’s gross domestic product — the value of all goods and services produced in the USA — increased at a seasonally adjusted annual rate of 0.7%, the Commerce Department said Friday, below the tepid 2.1% pace clocked both in the fourth quarter and as an average throughout the nearly 8-year-old recovery. Economists expected a 1% increase in output, according to a Bloomberg survey.

Even if you want to assume that it is a legitimate number, 0.7 percent economic growth is essentially stall speed, and this follows a year when the U.S. economy grew at a rate of just 1.6 percent.

So why is this happening?

To continue reading: 11 Reasons Why U.S. Economic Growth Is The Worst That It Has Been In 3 Years

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19 Facts That Prove Things In America Are Worse Than They Were Six Months Ago, by Michael Snyder

The more pessimistic among us might be inclined to see a recession in the offing. SLL rejects such pessimism. It’s going to be a depression. From Michael Snyder at theeconomiccollapseblog.com:

Has the U.S. economy gotten better over the past six months or has it gotten worse? In this article, you will find solid proof that the U.S. economy has continued to get worse over the past six months. Unfortunately, most people seem to think that since the stock market has rebounded significantly in recent weeks that everything must be okay, but of course that is not true at all. If you look at a chart of the Dow, a very ominous head and shoulders pattern is forming, and all of the economic fundamentals are screaming that big trouble is ahead. When Donald Trump told the Washington Post that we are heading for a “very massive recession“, he wasn’t just making stuff up. We are already seeing lots of things happen that never take place outside of a recession, and the U.S. economy has already been sliding downhill fairly rapidly over the past several months. With all that being said, the following are 19 facts that prove things in America are worse than they were six months ago…

#1 U.S. factory orders have now declined on a year over year basis for 16 months in a row. As Zero Hedge has noted, in the post-World War II era this has never happened outside of a recession…

In 60 years, the US economy has not suffered a 16-month continuous YoY drop in Factory orders without being in recession. Moments ago the Department of Commerce confirmed that this is precisely what the US economy did, when factory orders not only dropped for the 16th consecutive month Y/Y, after declining 1.7% from last month

#2 Factory orders have now reached the lowest level that we have seen since the summer of 2011.

#3 It is being projected that corporate earnings will be down 8.5 percent for the first quarter of 2016 compared to one year ago. This will be the fourth quarter in a row that we have seen year over year declines, and the last time that happened was during the last recession.

#4 Total business sales have fallen 5 percent since the peak in mid-2014.

#5 S&P 500 earnings have now fallen a total of 18.5 percent from their peak in late 2014.

#6 Corporate debt defaults have soared to the highest level that we have seen since 2009.

#7 The average rating on U.S. corporate debt has fallen to “BB”, which is lower than it has been at any point since the last financial crisis.

#8 The U.S. oil rig count just hit a 41 year low.

To continue reading: 19 Facts That Prove Things In America Are Worse Than They Were Six Months Ago

Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained” by Wolf Richter

This article is not for the faint of heart. From Wolf Richter at wolfstreet.com:

“Distress” in Bonds Spirals into Financial Crisis Conditions

The pile of toxic corporate bonds in the US, euphemistically called “distressed” debt, ballooned 15% in the single month of February to $327.8 billion, up 265% from a year ago, according to S&P Capital IQ. The number of S&P rated US companies with distressed debt rose 9% in February to 353, up 128% from a year ago.

The last time the pile of distressed debt had soared to this level was in November 2008, and the last time the number of distressed issuers had shot up to these levels was in October 2008; Lehman had declared bankruptcy in September.

These “distressed” junk bonds sport yields that are at least 10 percentage points above US Treasury yields, according to S&P Capital IQ’s Distressed Debt Monitor. Put into a chart, the fiasco in terms of dollars (in billions, black line) and number of distressed issuers (purple columns) looks like this:

And so Standard & Poor’s US Distress Ratio for junk bonds soared to 33.9 in February, from 29.6 in January, having increased relentlessly for nine months straight, nearly tripling from a year ago!

The ratio hit the highest level since July 2009, when it was coming down from the Financial Crisis. But this is the spine-chilling part: Back in September 2008, before the Lehman bankruptcy had fully registered in the ratio, but when the Financial Crisis was already gaining a good amount of momentum, and when stocks were crashing left and right and prudent people were wearing hardhats while out on the sidewalk, the distress ratio was “only” 28.9:

The distress ratio measures the extent to which risk is being priced into the bonds. A rising ratio is “typically a precursor to more defaults,” the report explains.

And it’s not just the oil-and-gas and the minerals-and-mining sectors that are getting crushed. Of the 607 distressed bond issues in the ratio, 172, or 28%, are oil-and-gas related and 80 bond issues, or 13%, are minerals-and-mining related. The remaining 59% are spread across other the spectrum.

To continue reading: Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained”

Europe’s ‘doom-loop’ returns as credit markets seize up, by Ambrose Evans-Pritchard

For much of last year, Ambrose Evans-Pritchard warned of inflation and economies overheating. Now he’s writing of doom-loops and a credit crisis. Oh well, one shouldn’t expect consistency, or much in the way of insight, out of journalists or politicians. From Evans-Pritchard at telegraph.co.uk:

‘We all know that QE2 is not really going to work but the market says “I’m a smoker, I know it kills me, but so long as I can get cigarettes, I’m happy”‘

Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago.

“People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca.

“We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said.

The perverse result is that investors are “shorting” the equity of bank stocks in order to hedge their positions, making matters worse.

Marc Ostwald, a credit expert at ADM, said the ominous new development is that bank stress has suddenly begun to drive up yields in the former crisis states of southern Europe.

“The doom-loop is rearing its ugly head again,” he said, referring to the vicious cycle in 2011 and 2012 when eurozone banks and states engulfed in each other in a destructive vortex.

It comes just as sovereign wealth funds from the commodity bloc and emerging markets are forced to liquidate foreign assets on a grand scale, either to defend their currencies or to cover spending crises at home.

Mr Ostwald said the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc,” he said.

To continue reading: Europe’s ‘doom-loop’ returns as credit markets seize up

The Adjustment Cycle, by Doug Nolan

From Doug Nolan at creditbubblebulletin.blogspot.com:

Crude has rallied about 5% off of last month’s low. The Brazilian real closed Friday at 3.90, having posted a decent rally from the January closing low of 4.16 to the dollar. Brazilian equities have bounced about 10%. This week saw Brazil’s currency rally 2.4%. In general, EM currencies and equities have somewhat stabilized, notably outperforming this week. Stocks posted gains in Brazil, Turkey and China. From Bloomberg: “Yuan in Longest Weekly Rally Since 2014 as China Raises Rhetoric.” The dollar index this week dropped 2.6%, which most would have expected to lend some market support.

If crude, commodities, EM, the strong dollar and the weak yuan were weighing on global market confidence, why is it that global financial stocks have of late taken such a disconcerting turn for the worse?

Thursday headlines: “Credit Suisse posts first loss since 2008”; “Credit Suisse shares crash to 24-year low.” This week saw Credit Suisse sink 15.2%, pushing y-t-d losses to 30.4%. European financial stocks continue to get hammered, some now trading near 2009 lows. Notably, Societe Generale this week fell 8.7% (down 25% y-t-d), Credit Agricole 6.1% (down 21%) and Deutsche Bank 5.2% (down 30%). From Bloomberg’s Tom Beardsworth: “Credit-default swaps tied to subordinated debt issued by Deutsche Bank rose to the highest since July 2012…” The STOXX Europe 600 Bank Index dropped 6.2% this week, boosting y-t-d declines to 19.9%. FTSE Italia All-Shares Bank Index sank 10.1%, increasing 2016 losses to 30.6%.

February 4 – Bloomberg (Tom Beardsworth): “European banks and insurers’ financial credit risk rose to the highest in more than two years, following a $5.8 billion loss at Credit Suisse Group AG and signs of a slowdown in the global economy. The cost of insuring subordinated debt climbed by 19 bps to 254 bps, the highest since July 2013, based on the Markit iTraxx Europe Subordinated Financial Index. An index of credit-default swaps tracking senior financial debt jumped six bps to 110 bps. Both indexes have risen for six days in a row…”

Here at home, the banks (BKX) sank 3.9%, trading this week at an almost 30-month low (down 16% y-t-d). The broker/dealers (XBD) fell 4.0%, sinking to the lowest level since December 2013 (down 18.7% y-t-d). Citigroup and Bank of America both have y-t-d (five-week) declines of 23%.

To continue reading: The Adjustment Cycle

The War on the Credit Cycle Has Only Just Begun… by Bill Bonner

From Bill Bonner at acting-man.com:

Socialism is for Simpletons

RHINEBECK, New York – We spent the weekend up north… where people put “Feel the Bern” bumper stickers on their Subarus. In a tavern in Rhinebeck – where we are writing – the “socialist” slap seems to have lost its sting. There is a reverential portrait of FDR near the bar.

“He’s the only candidate who makes any sense to me,” said a local. “You can’t trust Hillary. And the Republicans are all nuts.”

He seems to make a lot of sense… provided your horizon ends roughly at the edge of your plate.

He’s right. You can’t trust Hillary. The Republicans may all be nuts. And socialism “makes sense”… in a simpleton kind of way. Most voters want more stuff. Sanders offers to take stuff from other people and give it to them. That “makes sense,” doesn’t it?

Too bad. Because as Maggie Thatcher pointed out, you soon run out of other people’s money. But the voters of Dutchess County don’t seem to be concerned. Back to the markets…

Japan Drops the Big One

“Thank Goodness That’s Over,” proclaimed Barron’s on Friday, as the Dow added nearly 400 points. But is the bear market really over? What sent the Dow soaring was a surprise rate cut – this time by the Bank of Japan. This left short-term rates in Japan at negative 0.1%.

As we covered in the December issue of our monthly publication, The Bill Bonner Letter, in addition to the War on Poverty, the War on Drugs, and the War on Terror, there’s also a War on the Credit Cycle. It is a war to prevent a correction in the credit market. Credit has been increasing for the last 33 years – largely thanks to the feds’ undying support.

Before the link between the dollar and gold was severed, credit was rationed by a market. When savings are abundant and borrowers are few, supply and demand dynamics caused the price of credit to fall. This lowered the cost of capital, discouraged saving, and allowed businesses to undertake projects that, at higher interest rates, would not have been possible.

Thus stimulated, economic activity increased… businesses expanded… wages rose… spending increased… corporate profits, and the stock market, usually went up… and interest rates rose as more and more borrowers competed for fewer and fewer available savings.

Higher rates pinched off the credit expansion and encouraged people to save more money. Stocks, now competing with higher yields in the bond market and on bank deposits, went down again. That is how the credit cycle is supposed to work. It naturally corrects – in both directions.

To continue reading: The War on the Credit Cycle Has Only Just Begun...

Brazil’s Easy-Money Problem, by Lucas Vaz

From Lucas Vaz, cobdencentre.org:

Brazil is undergoing what is considered its worst economic crisis in seventy years, and there is usually no agreement when it comes to the causes of this situation. President Rousseff and the Labor Party say that it was the corollary of the “International Crisis,” a ghost of the 2008 depression created in their minds. The reality, however, is different. Since ex-president Lula Da Silva of the Labor Party entered office in 2003, the government has clung to the typical Keynesian project of growth-by-government-spending. Interest rates were lowered constantly, the amount of loans grew to an unprecedented level, savings per capita dropped, and government spending continued to grow.

For the advocates of government intervention, the country’s economy was heaven on earth. It should be of no surprise that Paul Krugman, the defender of America’s Quantitative Easing, said that Brazil was not a vulnerable country. However, those policies so strongly defended by some economists and by bureaucrats led the country toward the terrible situation in which it is now.

From the Brazilian government’s point of view, it could hardly get any worse: the country is facing an economic depression that is likely to last at least two more years, the country’s rating was downgraded to junk by Standard & Poor’s, and a corruption scandal may lead to the impeachment of the country’s president, Dilma Rousseff. We must recognize, however, that even though this was the result of the government’s action, it simply put in practice the most prevalent ideologies of the country, which is a mixture of Marxism in politics and in the universities with Keynesianism in economics. This national ideology praises, in general, a complete dependence of the people on the government. The fact that “Brazil’s tax burden already amounts to 36 per cent of GDP” is held with pride by professors and economists throughout the country, who spread the word that public policies will create jobs and contribute to people’s welfare.

Brazil and the Austrian Business Cycle Theory

In order to grasp what is happening to Brazil, and to understand why some economists have long ago predicted the current disaster, it is crucial to understand Austrian business cycle theory, since it yields a concrete critique of government’s involvement with currency and credit expansion — two factors that the Brazilian government used as tools for economic growth — and its misuse is what generated the crisis.

As Mises pointed out, “the cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business.”

Indeed, those “boom-bust” cycles, as the one that happened in Brazil, are generated by monetary interventionin the market in the form of bank credit expansion. Thus, they are an outcome of central planning and government intervention, the very opposite of a free market.

To continue reading: Brazil’s Easy-Money Problem