Tag Archives: Credit

Did the Economy Just Stumble Off a Cliff? by Charles Hugh Smith

It would be no surprise if the economy has faltered. The only surprise is how long it took. From Charles Hugh Smith at oftwominds.com:

The signs are everywhere for those willing to look: something has changed beneath the surface of complacent faith in permanent growth.
This is more intuitive than quantitative, but my gut feeling is that the economy just stumbled off a cliff. Neither the cliff edge nor the fatal misstep are visible yet; both remain in the shadows of the intangible foundation of the economy: trust, animal spirits, faith in authorities’ management, etc.
Since credit expansion is the lifeblood of the global economy, let’s look at credit expansion. Courtesy of Market Daily Briefing, here is a chart of total credit in the U.S. and a chart of the percentage increase of credit.
Notice the difference between credit expansion in 1990 – 2008 and the expansion of 2009 – 2017. Credit expanded by a monumental $40+ trillion in 1990 – 2008 without any monetary easing (QE) or zero-interest rate policy (ZIRP). The expansion of 2009 – 2017 required 8 long years of massive monetary/fiscal stimulus and ZIRP.
This chart of credit change (%) reveal just how lackluster the current expansion of credit has been, despite unprecedented trillions of stimulus pumped into the financial sector.
Here are two other snapshots of debt: margin debt and private credit. Both have hit new highs.
Note the tight correlation of margin debt to the S&P 500 stock index: when punters borrow more on margin to buy more stock, stocks keep rising.
When credit stops expanding, the economy stumbles into recession.
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We Do These Things Because They’re Easy: Our All-Consuming Dependence on Debt, by Charles Hugh Smith

Debt is, as SLL has said numerous times (see Debtonomics Archive), the foundation of both the US and global economy. From Charles Hugh Smith at oftwominds.com:

A world in which “we do these things because they’re easy” has one end-state: collapse.

On September 12, 1962, President John F. Kennedy gave a famous speech announcing the national goal of going to the moon by the end of the decade. (JFK’s speech on going to the moon.) In a memorable line, Kennedy said we would pursue the many elements of the space program “not because they are easy, but because they are hard.”
Our national philosophy now is “we do these things because they’re easy”– and relying on debt to pay today’s expenses is at the top of the list. What’s easier than tapping a line of credit to buy whatever you want or need? Nothing’s easier than borrowing money, especially at super-low rates of interest.
We are now totally, completely dependent on expanding debt for the maintenance of our society and economy. Every sector of the economy–households, businesses and government–all borrow vast sums just to maintain the status quo for another year.
Compare buying a new car with easy, low-interest credit and saving up to buy the car with cash. How easy is it to borrow $23,000 for a new $24,000 car? You go to the dealership, announce all you have to put down is a trade-in vehicle worth $1,000. The salesperson puts a mirror under your nose to make sure you’re alive, makes sure you haven’t just declared bankruptcy to stiff previous lenders, and if you pass those two tests, you qualify for a 1% rate auto loan. You sign some papers and drive off in your new car. Easy-peasy!
Scrimping and saving to pay for the new car with cash is hard. You have to save $1,000 each and every month for two years to save up the $24,000, and the only way to do that is make some extra income by working longer hours, and sacrificing numerous pleasures–being a shopaholic, going out to eat frequently, $5 coffee drinks, jetting somewhere for a long weekend, etc.
The sacrifice and discipline required are hard. What’s the pay-off in avoiding debt? Not much–after all, the new auto loan payment is modest. If we take a 5-year or 7-year loan, it’s even less. By borrowing $23,000, we get to keep all our fun treats and spending pleasures, and we get the new car, too.

Our Financial Buffers Are Thinning, by Charles Hugh Smith

The 2008 financial crisis almost sunk the global financial system, and the backup systems to prevent meltdown are weaker now than they were then. From Charles Hugh Smith at oftwominds.com:

The fragility of our financial buffers will only be revealed when they fail in the next crisis.
While buffer has a specific meaning in chemistry, I am using the word in the broad sense of a reserve resource that absorbs the initial destructive impacts of crises or system overloads. Marshland along a sea coast is a buffer against destructive storm waves, for example.
A savings account acts as a buffer against financial drawdowns or losses of income that would otherwise quickly cascade into a full-blown crisis.
Redundancy of resources can act as a buffer. If an airline maintains an aircraft in reserve, this reserve plane acts as a buffer against the disruption to the airline’s scheduled flights should one of its aircraft be unexpectedly removed from service by a mechanical failure. The reserve aircraft can replace the plane that was withdrawn from service with minimal disruption.
Stockpiles act as buffers against supply disruptions. A storage tank of oil buffers a refinery against any delay in its incoming shipments of crude oil. Supplies of food and water buffer against severe natural disasters that disrupt regional water service and food deliveries.
Credit can act as a financial buffer against unexpectedly high expenses or declines in revenue. If a tire on our vehicle goes flat during a road trip and we only have a few dollars cash, a credit card buffers the disruption by funding the replacement tire and labor.
But over-using credit can end up thinning our financial buffers. If someone starts using their credit card not as an emergency buffer but to augment their cash income–in effect, acting as if the borrowed money was a pay raise rather than a loan–their credit line diminishes to near-zero and when they actually need credit for an emergency, it’s no longer available.
A key feature of buffers is that it’s difficult for observers to tell if they’ve been thinned to the point where they can no longer stave off disruption. Outside observers can’t tell if the oil storage tank is full or empty, or if an individual’s credit card is maxed out or has a completely untapped credit line.

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

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