Most people’s strongest memory of the last financial crisis was the September 2008 bankruptcy of Lehman Brothers. However, thirteen months prior to that, August 2007, two Bear Stearns’ mortgage hedge funds went bankrupt. That was the bell tolling for the housing market, the mortgage securities market, and—because of the leverage and the interconnections—the global financial system itself. The Dow Jones Industrial Average would not make its high for another couple of months, but for those who knew what they were looking for, the Bear Stearns’ bankruptcies signaled the impending reversal in financial markets and the economy.
Sometimes one has to see the big picture, and sometimes looking at a host of smaller pictures is more worthwhile. While housing and mortgage finance were the epicenters of the last crisis, there will probably be no single identifiable catalyst for the next one. Not because there are no central-bank sponsored debt-driven bubbles out there, but because there are so many of them, all over the world. Multiple coal mine canaries are in extremis and they’re sending the same message as the Bear Stearns’ bankruptcies did.
If the US real economy is not already in a recession, it’s on the verge. Since 2014, the economy has lost 32,000 manufacturing jobs, while adding 547,000 food service jobs. Factory orders have declined on a year-over-year basis for 22 straight months, the longest non-”official” recessionary streak in history. As of August, the Cass Freight Index of transactions by large, non-bulk-commodity shippers has fallen year-over-year for eighteen straight months. Orders for new long-haul trucks have been in a twenty-month downtrend, and orders last month were the worst for a September since 2009. Volvo Trucks North America, Freightliner (a unit of Daimler), Navistar, and Paccar have announced or implemented layoffs this year.
The Merchandise World Trade Monitor topped out in January, 2015 and July’s number takes it back to the reading for September 2014. The world’s seventh largest container carrier, South Korea’s Hanjin, recently filed for bankruptcy. Closures and consolidation are the orders of the day for the remaining shippers. Bear markets, overcapacity, and gluts in a range of commodities, other raw materials, intermediate goods, and finished goods garnered a lot of headlines last year and early this year. The headlines have faded but not the underlying conditions. It will take years—far beyond the media’s attention span—and substantial pain before those conditions are remedied or even ameliorated.
Only in Wall’s Street’s bizarro world can the goods economy be dismissed as a small part of the overall economy, which is supposedly driven by finance and services. What does the finance industry finance and the service economy service? In many instances—this will come as no surprise to anybody but Wall Streeters—manufacturing, mining, oil extraction and refining, shipping and trade; all the sectors that are taking gas. Also no surprise: real economy deterioration affects finance and the rest of the service economy.
In August, commercial and industrial loans made by US banks fell for the first time since October 2010. The automobile sector has been a bright spot in the economy, but the lending, particularly subprime lending, that has fueled sales is unraveling. Delinquencies and defaults are rising for subprime auto loans. The delinquency rate is rising even for prime auto loans, although the absolute rate remains low. The aggregated earnings of companies in the S&P 500 have been down for five straight quarters, and will most likely be down for the quarter just ended. In 2015 and all but certainly for 2016, those companies have paid out more in share buybacks and dividends than they have earned.
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US commercial bankruptcy filings were up 38 percent year-over-year in September. For the first nine months of 2016 they were up 28 percent from the same period in 2015. Bankruptcy is no longer confined to the oil patch and mining industry. Notably, filings by retailers and restaurants, two bulwarks of the service economy, are increasing. In the last two weeks, four restaurant chains have filed. Say good-bye to that industry’s stellar job growth.
The recovery since 2009, such as it is, has bestowed most of its meager blessings on those in the top 1 percent of income and wealth. Here’s another inescapable reality for Wall Streeters: a central bank exchanging its conjured-from-thin-air fiat debt scrip for the government’s thin-air fiat debt scrip does not, cannot, produce anything of real economic value. It drives down the interest rate on the government’s fiat debt and it provides a windfall for the 1 percenters who can borrow at low or negative rate and propel asset prices. For the rest of us it’s inconsequential at best, but generally deleterious.
The inconsequentiality of debt monetization is confirmed by the real world details enumerated above, which indicate the weakest so-called recovery on record is faltering and will soon end, if it has not already done so. There is, of course, no chance that even the faltering will be officially recognized before the election. SLL has maintained that the period since 2009 is merely an interlude in an ongoing depression, similar to respites during the Great Depression. By discouraging true savings, adding to the debt pile, and driving down the return on investment, debt monetization has hindered rather than helped the real economy. The anemic growth rate since 2009 is not despite skyrocketing government debt and soaring central bank balance sheets, but because of them. FDR and his hapless New Dealers would be proud.
Weakness is even percolating up to the rarified ranks of the 1 percent. Rents are falling and high-end real estate sales slowing in Silicon Valley, the Bay Area, New York, and Houston, formerly pockets of economic strength. The art market, especially for “art” that most of us don’t call “art,” has noticeably softened. The demand for luxury goods isn’t what it used to be, and many purveyors have issued revenue and profit warnings. Those markets have been propelled by Chinese, Russian, and Arab buyers, but home economies are facing challenges and they’re pulling in their horns.
The “donut” of the global economy is history’s greatest debt bubble, fueled by governments and central banks. The unimportant “hole” is whatever critical hot spot ultimately sends markets and economies down the drain. Who knows which crisis will be assigned the “blame” for the impending cataclysm. The odds-on-favorite is the looming European banking crisis, but here are plenty of other contenders—a pension fund or insurance company driven to insolvency by ZIRP and NIRP, Chinese debt, an upside break out in Middle Eastern or Ukrainian hostilities, political turmoil in Europe or the US—take your pick. No matter which possibility proves out, be prepared. Things will get very ugly, very fast.
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