Last week we first noted that something unexpected has been going on in overnight funding markets: ever since March 20, the Effective Fed Funds rate has been trading above the IOER. This was unexpected for the simple reason that it is not supposed to happen by definition.
As a reminder, ever since the financial crisis, in order to push the effective fed funds rate above zero at a time of trillions in excess reserves, the Fed was compelled to create a corridor system for the fed funds rate which was bound on the bottom and top by two specific rates controlled by the Federal Reserve: the corridor "floor" was the overnight reverse repurchase rate (ON-RRP) which usually coincides with the lower bound of the fed funds rate, while on top, the effective fed funds rate is bound by the rate the Fed pays on Excess Reserves (IOER), i.e., the corridor "ceiling."
Or at least that's the theory. In practice, the effective FF tends to occasionally diverge from this corridor, and when it does, it prompts fears that the Fed is losing control over the most important instrument available to it: the price of money, which is set via the fed funds rate. And ever since March 20, this fear is front and center because as shown in the chart below, starting on March 20, the effective Fed Funds rate rose above the IOER first by just 1 basis point, and then, last Friday spiked as much as 4 bps above IOER.
To explain this bizarre phenomenon in which the EFF has been trading well above IOER in defiance of all of the Fed's monetary orthodoxy, we laid out several possible explanations, including that i) money market outflows around the April 15 tax deadline date and elevated GC repo rates; ii) the continued decline in excess reserves, and most ominously iii) another acute dollar shortage developing across the US banking system.
One day later, PrismFP picked up on this topic and elaborated on the third, and most notable point, concluding that "there has been a dollar funding/shortage issue brewing under our nose for months; it is just coming to fruition now because we are noticing the DXY breaking out higher. In other words, with FHLB’s selling less FF’s, participants are forced to pay a higher rate to find funds, and that drives rate differentials towards the Dollar." Some other notable observations from his latest note which we laid out last week:
Read the entire article
DAILY BUSINESS REPORT - Financial Updates, International Markets and Business News
Showing posts with label Credit. Show all posts
Showing posts with label Credit. Show all posts
April 29, 2019
August 7, 2018
"It's Been Crazy": Meet The Source Of China's Next Debt Crisis: Millennials With Credit Cards
Last October, when looking at the breathtaking growth in Chinese new debt, we pointed out the one segment where the danger was most acute: household debt, which in mid 2017 had surged by a whopping 43% in one year even as the growth across other debt categories was relatively stable.
In fact, as the next chart shows, Chinese households are on the verge of surpassing the nation's corporations as the biggest source of credit demand.
But what was behind the surge in household loan demand? As it turns out, it was merely the reality of China's surging prices coupled with stagnant incomes, forcing countless, mostly young Chinese residents to do what Americans have been doing for decades: charge it.
In a report on China's brand new infatuation with consumer credit, the FT highlights the case of Tom Wang, a graduate from a middle-ranked Chinese university, who struggling to find well-paid work after arriving in Shanghai turned to the only possible source to fund his spending: credit cards.
“Using credit cards did not feel like spending money, and the debt grew and grew,” said the 26-year-old, whose starting salary of Rmb3,000 ($470) a month could not cover rent and the consumption habits he called “irrational”, such as buying the latest smartphone.
To cover repayments and keep spending, Wang took on more debt, borrowing Rmb60,000 over four credit cards , before turning to online lenders for a further Rmb70,000. The problem is that interest payments quickly “snowballed” to an untenable Rmb1,500 a month, eating up half of his entire pretax income.
Read the entire article
In fact, as the next chart shows, Chinese households are on the verge of surpassing the nation's corporations as the biggest source of credit demand.
But what was behind the surge in household loan demand? As it turns out, it was merely the reality of China's surging prices coupled with stagnant incomes, forcing countless, mostly young Chinese residents to do what Americans have been doing for decades: charge it.
In a report on China's brand new infatuation with consumer credit, the FT highlights the case of Tom Wang, a graduate from a middle-ranked Chinese university, who struggling to find well-paid work after arriving in Shanghai turned to the only possible source to fund his spending: credit cards.
“Using credit cards did not feel like spending money, and the debt grew and grew,” said the 26-year-old, whose starting salary of Rmb3,000 ($470) a month could not cover rent and the consumption habits he called “irrational”, such as buying the latest smartphone.
To cover repayments and keep spending, Wang took on more debt, borrowing Rmb60,000 over four credit cards , before turning to online lenders for a further Rmb70,000. The problem is that interest payments quickly “snowballed” to an untenable Rmb1,500 a month, eating up half of his entire pretax income.
Read the entire article
July 16, 2018
China GDP Growth Slows After Record Contraction In Shadow Banking Credit
Following the largest contraction in 'shadow banking system' credit, and a record low for M2 growth, fears were building that China's economic growth prospects may lag expectations.
By way of background for tonight's economic data deluge, here are the lowlights.
The drop in shadow bank was particularly sharp for the second month in a row: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in June the lass granular M2 reading also posted a growth slowdown, rising only 8.0% in June, down from May's 8.3%, below consensus of 8.4%, and the lowest on record.
Both of which do nothing to help China's credit impulse. Investors see China's liquidity tightening...
Commenting on the ongoing slowdown in China's credit creation, Goldman said that the latest money and credit data highlighted the challenges the government is facing in loosening monetary policy.
But before we shift to the market's perceptions, don't forget, China's trade surplus with the US just hit a Trump-tantrum-creating record high...
Read the entire article
By way of background for tonight's economic data deluge, here are the lowlights.
The drop in shadow bank was particularly sharp for the second month in a row: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in June the lass granular M2 reading also posted a growth slowdown, rising only 8.0% in June, down from May's 8.3%, below consensus of 8.4%, and the lowest on record.
Both of which do nothing to help China's credit impulse. Investors see China's liquidity tightening...
Commenting on the ongoing slowdown in China's credit creation, Goldman said that the latest money and credit data highlighted the challenges the government is facing in loosening monetary policy.
But before we shift to the market's perceptions, don't forget, China's trade surplus with the US just hit a Trump-tantrum-creating record high...
Read the entire article
July 12, 2018
U.S. Consumers On An Unprecedented Debt Binge As Credit Card Debt Soars To An All-Time Record High
Americans are on an absolutely spectacular debt binge. Does this mean that the economy is getting better, or does this mean that U.S. consumers are totally tapped out and are relying on borrowed money to make it from month to month? On Monday, the Federal Reserve announced that total consumer credit in the United States increased by a whopping 24.6 billion dollars in May, which was far greater than the 12.4 billion dollar gain that economists were anticipating. Total U.S. consumer credit has now hit a grand total of 3.9 trillion dollars, but it is the “revolving credit” numbers that are getting the most attention. Revolving credit alone shot up by 9.8 billion dollars in May, and that was one of the largest monthly increases ever recorded. At this point, total “revolving credit” has reached a brand new all-time record high of 1.39 trillion dollars, and credit card debt accounts for nearly all of that figure.
The optimists will tell us that this is yet another sign that the U.S. economy is booming, and hopefully they are correct.
But does it really make sense for U.S. consumers to go on a historic debt binge when much of the country is already drowning in debt and just barely scraping by from month to month?
In a previous article, I pointed out that U.S. consumers have been spending more money than they make for 28 months in a row.
Read the entire article
The optimists will tell us that this is yet another sign that the U.S. economy is booming, and hopefully they are correct.
But does it really make sense for U.S. consumers to go on a historic debt binge when much of the country is already drowning in debt and just barely scraping by from month to month?
In a previous article, I pointed out that U.S. consumers have been spending more money than they make for 28 months in a row.
Read the entire article
April 3, 2018
Subprime Auto Bubble Bursts As "Buyers Are Suddenly Missing From Showrooms"
It was less than a month ago when we showed a series of "10 charts revealing an auto bubble on the brink", and which laid out several very troubling trends, including i) the average new vehicle loan hit a record high $31,099; ii) the average loan for a used auto climbed to a record high $19,589...
Summarizing the above is simple: cheap credit leads to easy lending conditions, and record prices as everyone floods into the market with lenders hardly discriminating who they give money to.
But, as we said in March, the key data which seems to suggest that the auto bubble may have run its course came from the following charts which showed that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer.
Commenting on these trends, Melinda Zabritski, Experian's senior director of automotive finance solutions warned that "we're certainly at a point where affordability is a question. When you look at how much income you need to support that payment, it certainly is higher than your average individual income." And nowhere was this more obvious than the auto sector's overreliance on stretched subprime borrowers, who remained the marginal source of auto demand as long as rates remained low.
However, with short term rates rising, with Libor soaring, low rates are increasingly a thing of the past.
"For some buyers, this is going to come as a surprise," said Jessica Caldwell, executive director of Industry Analysis for Edmunds.com. "For buyers with average credit scores, the rates are higher than a couple years ago and that will mean a higher monthly payment."
And, as we said last month, it will mean for a sharp drop in demand, especially among the most stressed consumer groups.
Read the entire article
Summarizing the above is simple: cheap credit leads to easy lending conditions, and record prices as everyone floods into the market with lenders hardly discriminating who they give money to.
But, as we said in March, the key data which seems to suggest that the auto bubble may have run its course came from the following charts which showed that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer.
Commenting on these trends, Melinda Zabritski, Experian's senior director of automotive finance solutions warned that "we're certainly at a point where affordability is a question. When you look at how much income you need to support that payment, it certainly is higher than your average individual income." And nowhere was this more obvious than the auto sector's overreliance on stretched subprime borrowers, who remained the marginal source of auto demand as long as rates remained low.
However, with short term rates rising, with Libor soaring, low rates are increasingly a thing of the past.
"For some buyers, this is going to come as a surprise," said Jessica Caldwell, executive director of Industry Analysis for Edmunds.com. "For buyers with average credit scores, the rates are higher than a couple years ago and that will mean a higher monthly payment."
And, as we said last month, it will mean for a sharp drop in demand, especially among the most stressed consumer groups.
Read the entire article
January 26, 2018
Mastercard Pushes Biometrics, Banks Follow
Mastercard has set a deadline for widespread use of biometric identification for its services across the whole of the EU: April 2019. Mastercard Identity Check, currently available in 37 countries, enables individuals to use biometric identifiers, such as fingerprint, facial, and iris recognition, to verify their identities when using a mobile device for online shopping and banking. The technology is not mandatory for customers, but from next year it will be vigorously promoted throughout the EU and many consumers will welcome it.
The impact will be felt not just by consumers but also by most European banks, since any bank that issues or accepts Mastercard payments will have to support identification mechanisms for remote transactions, alongside existing PIN and password verification. The deadline will also apply to all contactless transactions made at terminals with a mobile device.
Citing research it carried out with Oxford University, Mastercard says that 92% of banking professionals want to introduce biometric ID. This high number shouldn’t come as much of a surprise given the vast untapped value consumer data holds for banks and corporations as well the preference most banks have for electronic transactions. The study also claims that 93% of consumers would prefer biometric security to passwords, which is a surprise given the array of thorny issues biometrics throws up, including the threat it poses to privacy and anonymity and its deceptively public nature.
“A password is inherently private,” says Alvaro Bedoya, Professor of Law at Georgetown University. “The whole point of a password is that you don’t tell anyone about it. A credit card is inherently private in the sense that you only have one credit card.”
Read the entire article
The impact will be felt not just by consumers but also by most European banks, since any bank that issues or accepts Mastercard payments will have to support identification mechanisms for remote transactions, alongside existing PIN and password verification. The deadline will also apply to all contactless transactions made at terminals with a mobile device.
Citing research it carried out with Oxford University, Mastercard says that 92% of banking professionals want to introduce biometric ID. This high number shouldn’t come as much of a surprise given the vast untapped value consumer data holds for banks and corporations as well the preference most banks have for electronic transactions. The study also claims that 93% of consumers would prefer biometric security to passwords, which is a surprise given the array of thorny issues biometrics throws up, including the threat it poses to privacy and anonymity and its deceptively public nature.
“A password is inherently private,” says Alvaro Bedoya, Professor of Law at Georgetown University. “The whole point of a password is that you don’t tell anyone about it. A credit card is inherently private in the sense that you only have one credit card.”
Read the entire article
November 9, 2017
New Potential Credit Risk Bombs: Exotic, ‘Nonlinear’ and Private Transactions
The Wall Street Journal has a story today on a new type of credit market transaction described as “nonlinear finance”. That label alone should send off alarms, since one assumes it is truth in advertising, a rare commodity in Big Finance. “Nonlinear” says that under certain scenarios, the price of the instrument goes “nonlinear,” as in behaves in a radically different, ungraceful manner or can be expected to have its price gap out if particular conditions are met. That would also suggest the instrument would be hard to hedge.
One of the reasons I can’t be as specific as I’d like, as Wall Street Journal readers pointed out, is the actual article is thin on details. However, that isn’t as surprising as it should seem. These trades sound a lot like the old CDOs, the ones that blew up so spectacularly in the crisis. Technically, those were asset-backed securities, or ABS CDOs.1 If you were reading the financial press before the crisis, the only reporter who recognized the importance and riskiness of CDOs was the Financial Times’ Gillian Tett, who doggedly kept after them and managed to ferret out critical bits of information. CDOs also became large enough as a product that there was some aggregate data, but it wasn’t terribly reliable (one huge problem was the potential for double-counting).
And it also makes sense that financiers would find a new bottle for the old CDO wine, since any investor would probably have a lot of ‘splaining to do if he were to invest in something that was sold as a CDO, even if that was a straight up description.
First to the critical bits of the Journal story, then more discussion as to how worried to be about this development. From the Journal:
Read the entire article
One of the reasons I can’t be as specific as I’d like, as Wall Street Journal readers pointed out, is the actual article is thin on details. However, that isn’t as surprising as it should seem. These trades sound a lot like the old CDOs, the ones that blew up so spectacularly in the crisis. Technically, those were asset-backed securities, or ABS CDOs.1 If you were reading the financial press before the crisis, the only reporter who recognized the importance and riskiness of CDOs was the Financial Times’ Gillian Tett, who doggedly kept after them and managed to ferret out critical bits of information. CDOs also became large enough as a product that there was some aggregate data, but it wasn’t terribly reliable (one huge problem was the potential for double-counting).
And it also makes sense that financiers would find a new bottle for the old CDO wine, since any investor would probably have a lot of ‘splaining to do if he were to invest in something that was sold as a CDO, even if that was a straight up description.
First to the critical bits of the Journal story, then more discussion as to how worried to be about this development. From the Journal:
Read the entire article
September 21, 2017
S&P Downgrades China To A+ From AA- Due To Soaring Debt Growth
Four months after Moody's downgraded China to A1 from Aa3, unwittingly launching a startling surge in the Yuan as Beijing set forth to "prove" just how stable China truly is, moments ago S&P followed suit when the rating agency also downgraded China from AA- to A+ for the first time since 1999 citing risks from soaring debt growth, less than a month before the most congress for Chiina's communist leadership in the past five years is set to take place. In addition to cutting the sovereign rating by one notch, S&P analysts also lowered their rating on three foreign banks that primarily operate in China, saying HSBC China, Hang Seng China and DBS Bank China Ltd. are unlikely to avoid default should the nation default on its sovereign debt. Following the downgrade, S&P revised its outlook to stable from negative.
“China’s prolonged period of strong credit growth has increased its economic and financial risks,” S&P said. “Since 2009, claims by depository institutions on the resident nongovernment sector have increased rapidly. The increases have often been above the rate of income growth. Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent."
According to commentators, the second downgrade of China this year represents ebbing international confidence China can strike a balance between maintaining economic growth and cleaning up its financial sector, Bloomberg reported. The move may also be uncomfortable for Communist Party officials, who are just weeks away from their twice-a-decade leadership reshuffle.
The cut will “have a relatively big impact on Chinese enterprises since corporate ratings can’t be higher than the sovereign rating,” said Xia Le, an economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It will affect corporate financing.”
Read the entire article
“China’s prolonged period of strong credit growth has increased its economic and financial risks,” S&P said. “Since 2009, claims by depository institutions on the resident nongovernment sector have increased rapidly. The increases have often been above the rate of income growth. Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent."
According to commentators, the second downgrade of China this year represents ebbing international confidence China can strike a balance between maintaining economic growth and cleaning up its financial sector, Bloomberg reported. The move may also be uncomfortable for Communist Party officials, who are just weeks away from their twice-a-decade leadership reshuffle.
The cut will “have a relatively big impact on Chinese enterprises since corporate ratings can’t be higher than the sovereign rating,” said Xia Le, an economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It will affect corporate financing.”
Read the entire article
July 18, 2017
Cashless Society Alert: Visa Will Be Giving Up To $500,000 To Restaurants That Go ‘100% Cashless’
The push toward a cashless society is becoming more of a shove. Before today I had never heard of “The Visa Cashless Challenge”, but after reading about it I have to say that I am quite alarmed. Visa is trying to “encourage” businesses to go cashless, and one of the ways that they will be doing this is by “awarding up to $500,000 to 50 eligible US-based small business food service owners who commit to joining the 100% cashless quest”. The food industry is still one of the last bastions where cash is used very heavily, and so it makes sense that Visa would want to target that segment. Of course the more people that use cards to pay for meals, the more money that Visa will make.
When I go to restaurants, I almost always use cash, and I know a lot of other people that very much prefer to use cash in those situations as well. But if Visa has their way, soon all of us will be forced to use some form of digital payment instead. The following is an excerpt from the press release that Visa issued about this new “challenge”…
Today Visa (NYSE:V) announced it is launching a major effort to encourage businesses to go cashless. Aiming to create a culture where cash is no longer king, the program will give merchants increased ability to accept all forms of global digital payments. Visa will be encouraging and helping merchants go cashless by using innovation to their advantage in order to stay competitively connected to their customers.
To encourage businesses to go cashless, Visa is announcing The Visa Cashless Challenge, with a call to action for small business restaurants, cafés or food truck owners to describe what cashless means for them, their employees and customers. Visa will be awarding up to $500,000 to 50 eligible US-based small business food service owners who commit to joining the 100% cashless quest.
“At Visa, we believe you can be everywhere you want to be, and that it should be easy to pay and be paid in more ways than ever – whether it’s a phone, card, wearable or other device,” said Jack Forestell, head of global merchant solutions, Visa Inc. “With 70% of the world, or more than 5 billion people, connected via mobile device by 20201, we have an incredible opportunity to educate merchants and consumers alike on the effectiveness of going cashless.”
Read the entire article
When I go to restaurants, I almost always use cash, and I know a lot of other people that very much prefer to use cash in those situations as well. But if Visa has their way, soon all of us will be forced to use some form of digital payment instead. The following is an excerpt from the press release that Visa issued about this new “challenge”…
Today Visa (NYSE:V) announced it is launching a major effort to encourage businesses to go cashless. Aiming to create a culture where cash is no longer king, the program will give merchants increased ability to accept all forms of global digital payments. Visa will be encouraging and helping merchants go cashless by using innovation to their advantage in order to stay competitively connected to their customers.
To encourage businesses to go cashless, Visa is announcing The Visa Cashless Challenge, with a call to action for small business restaurants, cafés or food truck owners to describe what cashless means for them, their employees and customers. Visa will be awarding up to $500,000 to 50 eligible US-based small business food service owners who commit to joining the 100% cashless quest.
“At Visa, we believe you can be everywhere you want to be, and that it should be easy to pay and be paid in more ways than ever – whether it’s a phone, card, wearable or other device,” said Jack Forestell, head of global merchant solutions, Visa Inc. “With 70% of the world, or more than 5 billion people, connected via mobile device by 20201, we have an incredible opportunity to educate merchants and consumers alike on the effectiveness of going cashless.”
Read the entire article
July 14, 2017
Visa Trying to Bribe Merchants to Stop Taking Cash
The war on cash is escalating. A big driver isn’t central banks who want to be able to inflict negative interest rates on savers, or Treasuries who see cash transactions as hiding revenues from their tax collectors, but the payment networks that want to kill cash (and checks!) as competitors to their oh so terrific (and fee-gouging) credit and debit cards.
However, one bit of good news is there doesn’t appear to be much enthusiasm on the buyer, as in merchant, end.
First, the overview from the Wall Street Journal:
Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.
The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”
Read the entire article
However, one bit of good news is there doesn’t appear to be much enthusiasm on the buyer, as in merchant, end.
First, the overview from the Wall Street Journal:
Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.
The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”
Read the entire article
June 20, 2017
Good Luck Getting Out Of That Subprime Auto Loan When Used Car Prices Crash
We've written frequently in recent months about the coming subprime auto crisis which will very likely be prompted by a wave of off-lease vehicles that will flood the market with used inventory over the coming years. In fact, Morgan Stanley recently predicted that the surge in used inventory could result in as much as a 50% crash in used car prices over the next couple of years which would, in turn, put further pressure on the new car market which has already resorted to record incentive spending to maintain volumes.
Here are just a couple of our most recent notes on the topic:
Of course, while pretty much anyone has been able to purchase that brand new BMW of their dreams over the past 5 years...courtesy of a surge in subprime lending volumes....
Read the entire article
Here are just a couple of our most recent notes on the topic:
- Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can't Be Good
- New Warning Signs Emerge For Subprime Auto Securitizations
- Auto Lending Update - Someone Please Explain How This Is Not A Bubble
Of course, while pretty much anyone has been able to purchase that brand new BMW of their dreams over the past 5 years...courtesy of a surge in subprime lending volumes....
Read the entire article
June 1, 2017
Dear Fed, It's Not "Really Hard To Spot Bubbles"
Here are some visual aids to help the Fed spot the housing bubble.
Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”
But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.
Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.
“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”
So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.
What’s hard to predict accurately is when they’ll burst.
Read the entire article
Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”
But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.
Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.
“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”
So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.
What’s hard to predict accurately is when they’ll burst.
Read the entire article
May 31, 2017
The Greatest Financial Bubble In History
China is in the greatest financial bubble in history. Yet, calling China a bubble does not do justice to the situation. This story has been touched on periodically over the last year.
China has multiple bubbles, and they’re all getting ready to burst. If you make the right moves now, you could be well positioned even as Chinese credit and currency crash and burn.
The first and most obvious bubble is credit. The combined Chinese government and corporate debt-to-equity ratio is over 300-to-1 after hidden liabilities, such as provincial guarantees and shadow banking system liabilities, are taken into account.
Paying off that debt requires growth, but the growth itself is fueled by more debt. China is now at the point where enormous new debt is required to achieve only modest new growth. This is clearly non-sustainable.
The next bubble is in investment instruments called Wealth Management Products, or WMPs. You may remember hearing about in the Daily Reckoning and also covered in Bloomberg’s article China Is Playing a $9 Trillion Game of Chicken With Savers.
Picture this. You’re a middle-class Chinese saver and you walk into a bank. They offer you two investment options. The first is a bank deposit that pays about 2%. The other is a WMP that pays about 7%. Which do you choose?
Read the entire article
China has multiple bubbles, and they’re all getting ready to burst. If you make the right moves now, you could be well positioned even as Chinese credit and currency crash and burn.
The first and most obvious bubble is credit. The combined Chinese government and corporate debt-to-equity ratio is over 300-to-1 after hidden liabilities, such as provincial guarantees and shadow banking system liabilities, are taken into account.
Paying off that debt requires growth, but the growth itself is fueled by more debt. China is now at the point where enormous new debt is required to achieve only modest new growth. This is clearly non-sustainable.
The next bubble is in investment instruments called Wealth Management Products, or WMPs. You may remember hearing about in the Daily Reckoning and also covered in Bloomberg’s article China Is Playing a $9 Trillion Game of Chicken With Savers.
Picture this. You’re a middle-class Chinese saver and you walk into a bank. They offer you two investment options. The first is a bank deposit that pays about 2%. The other is a WMP that pays about 7%. Which do you choose?
Read the entire article
May 22, 2017
The Perfect Storm Hits Used-Car Values: The Foundation Of The Auto Industry Is Faltering
1) Trade Cycles and How They Affect New Vehicle Sales Velocity
Used car values determine in large the velocity of new car sales. Most new car transactions involve a trade. The level of equity in the trade oftentimes determines whether a new vehicle transaction will be successful or not. Inclining used car values lead to faster trade cycles while declining used car values lead to slower trade cycles. Dismal new car sales volume during our last recession created a shortage of used cars. This created a large supply and demand imbalance that made used car values soar from 2009 till 2014 as seen on this chart.
This time period was extremely favorable for new car sales because consumers found themselves in an equitable position on their vehicles in a very short period of time. To illustrate this, consider this chart of a 60-month loan.
The black line represents the principal balance owed. An optimal trade cycle occurs when the principal balance owed on a loan intersects with the market value of the vehicle. The bullish used car cycle for passenger cars ended in 2014 as a result of extreme pricing pressure from new car leases. Since 2014, used passenger car values have corrected and continue to underperform. This underperformance is largely due to the effects that falling used car values have had on new car sales velocity. A longer trade cycle results in a slower velocity of new car sales. Today, we’ve seen data suggesting that used car values can drop as much as 50% from current levels. Refer to the above loan chart and consider what a drop that large would mean for new car sales velocity in terms of trade cycles.
2) Increased Dependency on Leasing
Used car values also determine the effectiveness of leasing. The most significant component of a lease is the gap between the residual value and the sale price of the vehicle. A residual value is little more than a guess at the future value of a vehicle. Manufacturers and third party companies like ALG use current and historic used car value data to establish residuals. Because of this process, residual values tend to lag used car values. As residuals rise, the gap between the residual value and the sales price gets smaller leading to lower payments. As residuals fall, the gap becomes larger leading to higher payments.
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Used car values determine in large the velocity of new car sales. Most new car transactions involve a trade. The level of equity in the trade oftentimes determines whether a new vehicle transaction will be successful or not. Inclining used car values lead to faster trade cycles while declining used car values lead to slower trade cycles. Dismal new car sales volume during our last recession created a shortage of used cars. This created a large supply and demand imbalance that made used car values soar from 2009 till 2014 as seen on this chart.
This time period was extremely favorable for new car sales because consumers found themselves in an equitable position on their vehicles in a very short period of time. To illustrate this, consider this chart of a 60-month loan.
The black line represents the principal balance owed. An optimal trade cycle occurs when the principal balance owed on a loan intersects with the market value of the vehicle. The bullish used car cycle for passenger cars ended in 2014 as a result of extreme pricing pressure from new car leases. Since 2014, used passenger car values have corrected and continue to underperform. This underperformance is largely due to the effects that falling used car values have had on new car sales velocity. A longer trade cycle results in a slower velocity of new car sales. Today, we’ve seen data suggesting that used car values can drop as much as 50% from current levels. Refer to the above loan chart and consider what a drop that large would mean for new car sales velocity in terms of trade cycles.
2) Increased Dependency on Leasing
Used car values also determine the effectiveness of leasing. The most significant component of a lease is the gap between the residual value and the sale price of the vehicle. A residual value is little more than a guess at the future value of a vehicle. Manufacturers and third party companies like ALG use current and historic used car value data to establish residuals. Because of this process, residual values tend to lag used car values. As residuals rise, the gap between the residual value and the sales price gets smaller leading to lower payments. As residuals fall, the gap becomes larger leading to higher payments.
Read the entire article
May 19, 2017
UBS Hints At Rampant Auto Lending Fraud; "It’s Not Just Smoke And Mirrors Anymore"
For months we've written about the imminently doomed auto bubble in the U.S., spurred in no small part by an unprecedented relaxation of underwriting standards by banks that would put even the shenanigans of the 2008 mortgage crisis to shame. From stretched out lending terms to promotional interest rates, auto lenders have increasingly played every trick necessary to get those incremental new car buyers into the most expensive car their monthly budgets could possibly absorb.
That said, in recent weeks there has been growing concern that consumers, auto dealers and/or banks have been going beyond simply relaxing underwriting standards and have instead been forced to commit outright fraud in order to attract that incremental auto volume growth. As UBS Strategist Matthew Mish told Bloomberg, “something is definitely going on under the hood...it’s not just smoke and mirrors anymore.”
The evidence is growing. First, the explosion of technology makes gaining access to information to improve credit scores very simple. Internet searches for 'credit score' are at record levels. Second, our survey finds 21% of auto loan borrowers admitted to some form of inaccuracy in their loan applications. Third, there is growing concern reported among auto lenders around fraud, which is the extreme case of this behavior.
Overall, the explosion and adoption of technology makes gaining access to "proven" methods for improving credit scores extremely simple. To this point, the popularity of internet searches for "credit score" has been rising consistently and is near peak post-crisis levels (Figure 7). Similarly, our survey finds that 21% of auto loan borrowers admitted to some inaccuracy in their application for non-mortgage related debt (auto, student or credit card loan). More concerning, this trend may be systemic as 29% of other consumer loan (i.e., student loan, credit card) borrowers acknowledged some form of inaccuracy in their applications (Figure 8).
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That said, in recent weeks there has been growing concern that consumers, auto dealers and/or banks have been going beyond simply relaxing underwriting standards and have instead been forced to commit outright fraud in order to attract that incremental auto volume growth. As UBS Strategist Matthew Mish told Bloomberg, “something is definitely going on under the hood...it’s not just smoke and mirrors anymore.”
The evidence is growing. First, the explosion of technology makes gaining access to information to improve credit scores very simple. Internet searches for 'credit score' are at record levels. Second, our survey finds 21% of auto loan borrowers admitted to some form of inaccuracy in their loan applications. Third, there is growing concern reported among auto lenders around fraud, which is the extreme case of this behavior.
Overall, the explosion and adoption of technology makes gaining access to "proven" methods for improving credit scores extremely simple. To this point, the popularity of internet searches for "credit score" has been rising consistently and is near peak post-crisis levels (Figure 7). Similarly, our survey finds that 21% of auto loan borrowers admitted to some inaccuracy in their application for non-mortgage related debt (auto, student or credit card loan). More concerning, this trend may be systemic as 29% of other consumer loan (i.e., student loan, credit card) borrowers acknowledged some form of inaccuracy in their applications (Figure 8).
Read the entire article
December 20, 2016
Tis The Season For Credit Card Debt: This Christmas Americans Will Spend An Average Of 422 Dollars Per Child
For many Americans, the quality of Christmas is determined by the quality of the presents. This is especially true for our children, and some of them literally spend months anticipating their haul on Christmas morning. I know that when I was growing up Christmas was all about the presents. Yes, adults would give lip service to the other elements of Christmas, but all of the other holiday activities could have faded away and it still would have been Christmas as long as presents were under that tree on the morning of December 25th. Perhaps things are different in your family, but it is undeniable that for our society as a whole gifts are the central feature of the holiday season.
And that is why so many parents feel such immense pressure to spend a tremendous amount of money on gifts for their children each year. Of course this pressure that they feel is constantly being reinforced by television ads and big Hollywood movies that continuously hammer home what a “good Christmas” should look like.
Once again in 2016, parents will spend far more money than they should because they want to make their children happy. According to a brand new survey from T. Rowe Price, parents in the United States will spend an average of 422 dollars per child this holiday season…
More than half of parents report they aim to get everything on their kids’ wish lists this year, spending an average of $422 per child, according to a new survey from T. Rowe Price.
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And that is why so many parents feel such immense pressure to spend a tremendous amount of money on gifts for their children each year. Of course this pressure that they feel is constantly being reinforced by television ads and big Hollywood movies that continuously hammer home what a “good Christmas” should look like.
Once again in 2016, parents will spend far more money than they should because they want to make their children happy. According to a brand new survey from T. Rowe Price, parents in the United States will spend an average of 422 dollars per child this holiday season…
More than half of parents report they aim to get everything on their kids’ wish lists this year, spending an average of $422 per child, according to a new survey from T. Rowe Price.
Read the entire article
November 1, 2016
Over Half A Trillion In M&A: October Mergers Smash All Records With $500.1 Billion In Deals
Last week David Rosenberg pointed out that mega Merger Manias like the one we are experiencing "invariably takes place at or near cycle peaks, as companies realize that they can no longer grow their earnings organically. We have just witnessed five multi-billion dollar deals this past week alone — $207 billion globally (AT&T/Time Warner; TD Ameritrade/Scottrade) in what has been the most active announcement list since 1999 … what do you know, near the tail end of that tech bull market too."
And now that October is officially over, we can close the books on what has been an unprecedented month for M&A. According to Bloomberg, in the month when a chill was sent through the spines of corporate CFOs and their investment bankers over fears that rates are about to rise and thus make debt-funded deals more expensive, the scramble to acquire competitors went off the charts, leading to an all time high in global M&A with almost half a trillion dollars of mergers and acquisitions announced globally.
CenturyLink Inc.’s $34 billion acquisition of Level 3 Communications Inc., as well as General Electric Co.’s deal to combine its oil and gas division with Baker Hughes Inc., pushed October’s deal volumes to about $489 billion, according to data compiled by Bloomberg. That’s the highest amount for at least 12 years, topping the previous record of $471 billion in April 2007, the data show.
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And now that October is officially over, we can close the books on what has been an unprecedented month for M&A. According to Bloomberg, in the month when a chill was sent through the spines of corporate CFOs and their investment bankers over fears that rates are about to rise and thus make debt-funded deals more expensive, the scramble to acquire competitors went off the charts, leading to an all time high in global M&A with almost half a trillion dollars of mergers and acquisitions announced globally.
CenturyLink Inc.’s $34 billion acquisition of Level 3 Communications Inc., as well as General Electric Co.’s deal to combine its oil and gas division with Baker Hughes Inc., pushed October’s deal volumes to about $489 billion, according to data compiled by Bloomberg. That’s the highest amount for at least 12 years, topping the previous record of $471 billion in April 2007, the data show.
Read the entire article
October 25, 2016
Credit Card Delinquencies Creep Up To Highest Levels Since 2012 As Subprime Issuance Soars
As Obama's "recovery" rolls along, the Wall Street Journal points out that the delinquency rates of subprime credit cards has surged to the highest levels recorded since 2012. Moreover, per TransUnion data, delinquency rates on cards issued in 2015 are close to 3%, or roughly double the overall rate, indicating that consumers have grown increasingly dependent on credit cards over the past couple of years to fund daily expenses.
Credit-card lending to subprime borrowers is starting to backfire.
Missed payments on credit cards that lenders issued recently are higher than on older cards, according to new data from credit bureau TransUnion. Nearly 3% of outstanding balances on credit cards issued in 2015 were at least 90 days behind on payments six months after they were originated. That compares with 2.2% for cards that were given out in 2014 and 1.5% for cards in 2013.
The poorer performance on newer cards pushed up the 90-day or more delinquency rate for all credit cards to 1.53% on average nationwide in the third quarter. That’s the highest level since 2012.
Meanwhile, FRED data reveals that while overall credit card delinquency rates remain at 10-year lows, the trends has been higher over the past several quarters.
Read the entire article
Credit-card lending to subprime borrowers is starting to backfire.
Missed payments on credit cards that lenders issued recently are higher than on older cards, according to new data from credit bureau TransUnion. Nearly 3% of outstanding balances on credit cards issued in 2015 were at least 90 days behind on payments six months after they were originated. That compares with 2.2% for cards that were given out in 2014 and 1.5% for cards in 2013.
The poorer performance on newer cards pushed up the 90-day or more delinquency rate for all credit cards to 1.53% on average nationwide in the third quarter. That’s the highest level since 2012.
Meanwhile, FRED data reveals that while overall credit card delinquency rates remain at 10-year lows, the trends has been higher over the past several quarters.
Read the entire article
October 21, 2016
David Rosenberg Calls For A Multi-Trillion, "Helicopter Money" Stimulus Package
With the inherent weakness in US GDP and the rising probability of a recession (two weeks ago Bank of America modeled that the next recession would likely start roughly one year from now), Gluskin Sheff's David Rosenberg thinks that with monetary options exhausted it will take a fiscal boost in the trillions of dollars to kickstart the economy. These issues were discussed in an extended interview with Real Vision TV, where the chief economist and strategist at Gluskin Sheff proposed some radical policies to engineer the growth needed in nominal income.
His ideas, some of which can be seen here in a clip of the interview, include helicopter money attached to a $2 trillion perpetual bond, massive infrastructure spending and measures to tackle the $1 trillion student debt load that has seriously hamstrung the economy.
Doing the Same Thing Over Again and Expecting a Different Outcome
Whether the US will in fact experience the technical definition of a recession is a matter of fervent debate, with the odds something like 20%-30%, according to Rosenberg (60% according to Deutsche Bank), but with growth averaging around 1%, there is no doubt the economy is weak.
“There are some people saying a recession is here right now,” Rosenberg says, “I don't think that we meet those conditions yet. But people say, well, look. Twelve months in a row of negative year on year industrial production, that's never happened outside recession, check. We've had now going into six quarters of profit contraction, year over year. That's only happened in the context of a recession, check. I mean, all that is true, but so much of this has been related to the oil shock that we had.”
Read the entire article
His ideas, some of which can be seen here in a clip of the interview, include helicopter money attached to a $2 trillion perpetual bond, massive infrastructure spending and measures to tackle the $1 trillion student debt load that has seriously hamstrung the economy.
Doing the Same Thing Over Again and Expecting a Different Outcome
Whether the US will in fact experience the technical definition of a recession is a matter of fervent debate, with the odds something like 20%-30%, according to Rosenberg (60% according to Deutsche Bank), but with growth averaging around 1%, there is no doubt the economy is weak.
“There are some people saying a recession is here right now,” Rosenberg says, “I don't think that we meet those conditions yet. But people say, well, look. Twelve months in a row of negative year on year industrial production, that's never happened outside recession, check. We've had now going into six quarters of profit contraction, year over year. That's only happened in the context of a recession, check. I mean, all that is true, but so much of this has been related to the oil shock that we had.”
Read the entire article
April 1, 2016
2016: The End Of The Global Debt Super Cycle
After the stock market crash of 1987, The Federal Reserve embarked on a path that led to the biggest debt bubble in the history of the world. The day after the 1987 crash (Oct. 20, 1987) Alan Greenspan, Chairman of the Fed, announced to the world that The Fed stood ready to provide whatever liquidity was needed by the banking system to prevent the crash from turning into a systemic financial crisis. That was the day the Fed “put” was born.
A put is an option that allows its owner to sell a specified amount of a particular asset at a predetermined price by a specific date. As an example, if an investor had a February 90 put on Apple’s stock that investor would have the right to sell 100 shares at 90 a share until the third Friday in February when the option expired. An investor would only exercise that put if Apple’s stock price dropped below 90 a share before expiration. As it stands Apple’s stock price is 94.02 as of Friday’s close so no rational investor would exercise that put. But if on Monday Apple’s stock crashed and was trading 60 a share than the investor would exercise his put and gladly sell his stock at 90 a share to the person who sold him the put. So in effect after 1987 The Fed was acting as a giant put for the financial markets, a role it had heretofore not played.
In September of 1998 Long Term Capital Management, a highly leveraged high profile hedge fund, sustained losses that threatened its solvency. The fund with a few billion in equity had $80 billion in assets and all of its trades were going against the firm. LTCM’s equity was going to be wiped out within days. Warren Buffet and a consortium of investors offered to bail out the fund by paying fire sale prices for the assets and shutting down the fund. LTCM’s management balked and looked to The Fed for a better solution. The Fed engineered a bailout by numerous banks that left LTCM’s management in place with some of their wealth to spare. Once again, The Fed intervened in a market calamity and this time bailed out an extremely reckless hedge fund that should have been allowed to fail. The Fed’s put engendered moral hazard in the hedge fund community by allowing reckless and destabilizing behavior to go unpunished.
Read the entire article
A put is an option that allows its owner to sell a specified amount of a particular asset at a predetermined price by a specific date. As an example, if an investor had a February 90 put on Apple’s stock that investor would have the right to sell 100 shares at 90 a share until the third Friday in February when the option expired. An investor would only exercise that put if Apple’s stock price dropped below 90 a share before expiration. As it stands Apple’s stock price is 94.02 as of Friday’s close so no rational investor would exercise that put. But if on Monday Apple’s stock crashed and was trading 60 a share than the investor would exercise his put and gladly sell his stock at 90 a share to the person who sold him the put. So in effect after 1987 The Fed was acting as a giant put for the financial markets, a role it had heretofore not played.
In September of 1998 Long Term Capital Management, a highly leveraged high profile hedge fund, sustained losses that threatened its solvency. The fund with a few billion in equity had $80 billion in assets and all of its trades were going against the firm. LTCM’s equity was going to be wiped out within days. Warren Buffet and a consortium of investors offered to bail out the fund by paying fire sale prices for the assets and shutting down the fund. LTCM’s management balked and looked to The Fed for a better solution. The Fed engineered a bailout by numerous banks that left LTCM’s management in place with some of their wealth to spare. Once again, The Fed intervened in a market calamity and this time bailed out an extremely reckless hedge fund that should have been allowed to fail. The Fed’s put engendered moral hazard in the hedge fund community by allowing reckless and destabilizing behavior to go unpunished.
Read the entire article
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