Former BIS Chief Economist Warns "More Dangers Now Than In 2007"

India’s debt problems go back a long way, and there are significant governance issues, including at state-owned banks.

China’s debt situation isn’t a lot different to India’s, but the acceleration of loans and credit growth in China is very fast

It’s not just the debt level in China that is worrisome, but the speed that it’s accumulating; maybe some of these loans won’t be repaid or serviced.

We don’t have a liquidity problem that central banks can solve - if we have too much debt, we have a debt resolution or insolvency problem and only governments can address problems like that.

World needs more fiscal expansion, structural reforms, and also have to look closely at debt write-off some of it and maybe recapitalize financial institutions.

We have got the mix of income that goes to capital versus labor wrong in many countries, and we need to look at that.

Central bank tightening is inevitable, but have to be careful.

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Debt Nightmare: Does Anyone Actually Care That Our Exploding National Debt Is Destroying Our Future?

When will America finally wake up?  The borrower is the servant of the lender, and we now have a colossal 20 trillion dollar chain around our collective ankles.  We have willingly enslaved ourselves, our children and our grandchildren, and yet our addiction is so insatiable that we continue to add more than 100 million dollars to our debt load every single hour of every single day.  The national debt is sitting at a grand total of $20,162,176,797,904.13 at this moment, but now that the debt ceiling has been lifted that number is expected to shoot up very rapidly toward 21 trillion dollars by the end of the year.  The national debt had been held down by accounting tricks to keep it under the debt limit for many months, but every time this has happened before we have seen the national debt absolutely explode back to projected levels once the debt ceiling was raised.

But very few of our “leaders” in Washington seem to care that we are in the process of committing national suicide.  There is no possible way that we will be able to continue to be the most powerful economy on the planet if we continue down this road.  During Obama’s eight years in the White House, we added more than 9 trillion dollars to the national debt. That certainly improved things in the short-term, because if we could go back and take 9 trillion dollars out of the economy over the past 8 years we would be in an absolutely nightmarish economic depression right now.

But even with all of this borrowing and spending, our economy has still only grown at an average rate of just 1.33 percent a year over the last 10 years.

And by going into so much debt, we are literally destroying the future for our children and our grandchildren.

What we are doing to them is beyond criminal, and people should be going to prison over this.  But instead we just keep rewarding these Congress critters by sending the same cast of characters back to Washington over and over again.

Are we insane?

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A Matter Of "Trust": A Look Inside China's Crackdown Of Its $3 Trillion Shadow Banking Industry

Finally, even if China manages to crackdown on Shadow Banking there is another problem: as a recent report by Natixis put it perfectly, "when one [credit] door closes [in China], another one opens up." This simply means that as Beijing slams the door shut on Trust and other key shadow debt components, these will be offset by an increased usage in others such as WMPs, NBFIs, Repos, Negotiatable Certificates of Deposit, and money markets. Below are the highlights from the report:

As deleverage becomes a higher level objective (but sometimes conflicting) to the Chinese leadership, banks now face more restrictions from regulators. In any event, this is not the first time they find themselves in the regulatory whirlpool. From the usage of repo agreements to wealth management products (WMPs), and most recently negotiable certificate of deposits (NCDs), banks have been very creative in playing the cat and mouse game in front of evolving regulations.

Flourishing financial innovation has helped China’s leverage process to continue unabated. The deleveraging process has hardly begun. In contrast, liquidity seems to be increasingly scarce, which keeps on lifting the cost of funding. In fact, overnight SHIBOR is at record high since the difficult events in 2015, very close to 3% (Chart 1). One of the key reasons for the liquidity shortage is related to tighter regulatory control from the People's Bank of China (PBoC), in particular stricter Macro Prudential Assessment (MPA). This has hampered the use of WMPs to fund banks’ asset growth. They have already shrunk by 1.6 RMB trillion to 28.4 RMB trillion in May 2017 (Chart 2)

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Toronto Home Price Bubble Bursts Into Bear Market

With surprise rate hike, Bank of Canada turns against housing market...

Home sales in the Greater Toronto Area, the largest housing market in Canada, plunged 34.8% in August compared to a year ago, to 6,357 homes, with sales of detached homes and semi-detached homes getting eviscerated:

Sales by type:

Detached houses -41.6%

Semi-detached houses -37.3%

Townhouses -27.5%:

Condos -28.0%.

Even as total sales plunged, the number of active listings of homes for sale soared 65% year-over-year to 16,419, with 11,523 new listings added in August, according to the Toronto Real Estate Board (TREB).

“The relationship between sales [plunging] and listings in the marketplace today [soaring] suggests a balanced market,” the report explained, adding hopefully:

“If current conditions are sustained over the coming months, we would expect to see year-over-year price growth normalize slightly above the rate of inflation. However, if some buyers move from the sidelines back into the marketplace, as TREB consumer research suggests may happen, an acceleration in price growth could result if listings remain at current levels.”

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NYC Commercial Real Estate Sales Plunge Over 50% As Owners Lever Up In The Absence Of Buyers

So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years?  Well, you lever up, of course. 

As Bloomberg notes this morning, the 'smart money' at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while 'dumb money' buyers have completely dried up.

A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.

At the same time, the market for debt on commercial properties is booming. Investors of all stripes -- from banks and insurance companies to hedge funds and private equity firms -- are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.

“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.

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US Bitcoin Exchange Coinbase Hits 10 Million Users

After two (and soon three) "generational" market crashes, Joe Sixpack may have lost interest in the stock market (or at least in single names, the transfer of bagholder rights from institutions to retail investors via ETFs is doing just fine), but when it comes to chasing torrid, upward price momentum, US retail investors are doing their best frenzied Chinese housewife impression now that they have discovered the next big bubble thing, and it's called bitcoin. And nowhere is America's sudden infatuation with cryptocurrencies such as bitcoin, ethereum, litecoin and all other "coins" which can make (or break) a hedge fund's annual return in days if not hours, more obvious than on Coinbase, the US bitcoin exchange, which has just hit a remarkable 10 million registered users, all of whom are there for just one thing: to trade, but mostly buy, crypto currencies.

The San Francisco startup has seen tremendous growth in 2017, adding thousands of users per day and handling increasing levels of trading volume. Last month, CEO Brian Armstrong announced that the company had raised $100 million during its latest funding round, giving the company a valuation of $1 billion, making it first “bitcoin unicorn” according to Cryptocoinsnews. A few weeks later, following the latest burst higher in bitcoin, Coinbase has surpassed 10 million registered users. In the last three weeks of August, the bitcoin exchange added an astonishing 800,000 users as the bitcoin price briefly rose above $5,000. According to data from the Coinbase website, the exchange and wallet service has also recently surpassed $20 billion in total volume.

While many bitcoin veterans have panned Coinbase for its simplistic approach to trading (no limit orders, no shorting, etc) and exorbitant fees, some actually enjoy the minimialist, if expensive, experience: one user on reddit, btcltc77, referred to the exchanges as the “McDonald’s of Bitcoin banking.”

Coinbase is still the most mainstream way of buying Bitcoin. It’s the McDonald’s of Bitcoin banking.

That, and the implied safety net from its increasingly bigger venture backing, appears to be working and has made Coinbase the go-to site for millions of armchair cryptocurrency investors.

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These cheap retail stocks can hold their own against Amazon

When it comes to consumer stocks, it's the best of times and the worst of times.  

On the plus side, consumer sentiment is strong. The Conference Board's measure of consumer confidence hit a 16-year high a few months back, and there's little sign of a slowdown. July retail figures released a few weeks ago were the best they've been all year.

Yet retail and consumer stocks have been toxic despite these broader metrics. The SPDR S&P Retail ETF XRT, +1.35%  , for example, is down more than 15% in the past two years vs. a 25% gain for the S&P 500 SPX, +0.20%  ; this year so far the fund is down 10% vs. a 10% gain for the S&P 500

Are consumer stocks and traditional retailers dead forever? Or are they poised for a comeback as the all-important holiday shopping season kicks off?

Unfortunately, there are no easy answers. Certain segments of specialty retail have remained resilient, while others look to be down for the count. But take a closer look at the fundamentals of these three specific companies after their recent earnings reports. Each of them a good chance of mounting a late-2017 comeback, particularly if consumer sentiment stays strong:

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Visualizing The Unparalleled Explosion In Cryptocurrencies

After the massive Bitcoin price surge in November 2013, the popularity of launching new cryptocurrencies took off along with it.

In fact, as Visual Capitalist's Jeff Desjardins notes, if you go back at historical snapshots around that time, you’ll see that there were literally hundreds of new coins available to mine and buy. Here’s one from November 2014 – a time when there were only 32 coins that were worth more than $1 million in market cap, and 354 coins that were worth less than $50,000, usually trading for tiny fractions of a cent.

It seems like everyone and their dog were launching cryptocurrencies back then, even if they were a longshot to materialize into anything.

Then vs. Now

Fast forward to today, and things haven’t changed much – many people and companies are still launching new cryptocurrencies through a mechanism known as an ICO (Initial Coin Offering).

The only difference?

Today, there is real money at play, and in 12 months the number of cryptocurrencies worth >$1 million has soared by 468%. Meanwhile, the total value of all currencies together has skyrocketed by 1,466%.

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Six Banks Join UBS's "Utility Coin" Blockchain Project

Here’s a piece of news that the remaining human members of Wall Street’s FX sales and trading desks probably don’t want to hear.

According to the Financial Times, six of the world’s largest banks have decided to join a blockchain project called “utility coin” that will allow banks to settle trades in securities denominated in different currencies without a money transfer. What’s worse, the banks expect to begin live-testing the project late next year.

“Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street have teamed up to work on the “utility settlement coin” which was created by Switzerland’s UBS to make financial markets more efficient.

The move comes as the project shifts into a new phase of development, in which its members aim to deepen discussions with central banks and to work on tightening up its data privacy and cyber security protections.”

The project’s managers say they’ve already involved representatives from various central banks…

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Nomi Prins: A Decade Of G7 Central Bank Collusion... And Counting

Since late 2007, the Federal Reserve has embarked on grand-scale collusion with other G-7 central banks to manufacture a massive amount of money. The scope and degree of this collusion are historically unprecedented and by admission of the perpetrators, unconventional in approach, and - depending on the speech - ineffective.

Central bank efforts to provide liquidity to the private banking system have been delivered amidst a plethora of grandiose phrases like “unlimited” and “by all means necessary.” Central bankers have played a game with no defined goalposts, no clock rundown, no max scores, and no true end in sight.

At the Fed’s instigation, central bankers built policy on the fly. Their science experiment morphed into something even Dr. Frankenstein couldn’t have imagined. Confidence in the Fed and the U.S. dollar (as well as in other major central banks globally) has dropped considerably, even as this exercise remains in motion, and even though central bankers have tactiltly admitted that their money creation scheme was largely a bust, though not in any one official statement.

Cracks in the Facade

On July 31, 2017, Stanley Fischer, vice chairman of the Fed, delivered a speech in Rio de Janeiro, Brazil. There, he addressed the phenomenon of low interest rates worldwide.

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Emerging Market Debt: Dumb, Dumber, And Dumbest

One of the classic signs that the credit cycle is nearing the end is that borrowers that shouldn’t be getting financed not only get funded, but get it at terms that seem crazy. I’ve recently written about the silly things happening in global high yield debt, Chinese debt and the global attitude to sovereign debt. Continuing this theme are recent examples of emerging market sovereign debt; Greece, Argentina and Iraq. Each of these shouldn’t have been funded, but the desperation for yield saw all three get funded on terms that seem crazy. Here’s the detail on each.

Conclusion

In considering emerging market debt, investors have to be careful to consider each country on its own merits. In the examples of Argentina, Greece and Iraq, bond buyers have suspended sceptical analysis. They’ve banked the equity case, hoping for a substantial change from historical precedents, even though they won’t get a share of the upside if the rosy scenario occurs.

The examples aren’t unusual; as shown in the graph below from Bloomberg Belarus, Mongolia and Ukraine are all CCC+ rated but have bonds yielding less than 6%.

These examples point to the greater fool theory playing out in many credit markets. We’ve now reached the point in the credit cycle where further gains seem dependent upon more dumb money arriving and pushing spreads even tighter.

How much longer can this farce continued?

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What Does the Surprise Selection of Expedia’s Dara Khosrowshahi as CEO Mean for Uber?

You could have gotten whiplash from watching Uber’s CEO selection ping pong today. First former supposed lead horse, ex GE CEO Jeff Immelt, withdrew, apparently because he’d gotten wind he wasn’t going to get the nod. Then the press briefly reported that HP’s Meg Whitman was who the board wanted….despite her having said firmly she didn’t want the job, twice. It turns out she’d come on Saturday, apparently at Benchmark’s behest, and given the board a little speech on what she thought Uber ought to do.

Not long after that, the press started reporting that the board had settled on a name that had been kept under wraps, that of Dara Khosrowshahi, currently the CEO of Expedia, who was also the highest paid CEO in 2015, pulling down a cool $94.5 million in 2015. While there has been some grumbling about Khosrowshahi’s rich compensation, he’s never made any of the “overpaid CEO” lists. That’s because his spectacular 2015 payday was almost entirely the result of a grant of $90.8 million in stock options…for signing a long term employment agreement stipulating that he remain at the helm until September 2020. In 2016, his pay was a more staid $2.45 million.

But Khosrowshahi is going to be Uber’s $100+ million man, since that’s going to be the order of magnitude cost of buying him out from his Expedia agreement plus whatever special inducements needed for him to join Uber (almost certainly vastly richer in expected comp if you believe that Uber will be able to do an IPO at a suitably lofty valuation, an idea we regard with considerable skepticism).

The press has been positive about the choice, if nothing else because Expedia has been a drama-free tech company and the financial media likes the idea of a tech CEO for Uber (arguably a necessity to keep up the fantasy that a local transportation company deserves a unicorn premium). Expedia managed to be one of two winners in what was originally a four-company fight for dominance in the travel booking business. And it also represents at least a momentary cessation of hostilities at the Uber board, since the vote on Khosrowshahi was unanimous. Recode gives some detail about his background, focusing on factors that may help him succeed, without acknowledging the magnitude of the task.

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On The Coming Collapse Of China's Ponzi Scheme Economy

As long as it keeps growing everything is fine. When it stops growing it collapses.

In this case you justify production with demand based purely on more production. As long as you keep pushing production up everything looks fine. At its peak in 2014 China turned out 30 times more cement than the United States, and the latest production figures are only a smidgen less than 2014’s.

Command systems may be good at deciding where to direct economic effort in wartime but they are hopeless in peacetime at deciding when to stop and do something else.

They just keep going down the same old track and then what you get is economic cancer, uncontrollable growth.

You don’t see it right away. Any Ponzi scheme looks just fine as long as more people can be found to put their money in. But the end is inevitable and the longer it is delayed the more resounding the collapse.

It has so long been delayed in the mainland that, when the end finally comes, I believe more than half of the loans and advances of the financial system will prove irrecoverable, which would be very resounding indeed.

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Ford To Abandon "Traditional Credit Scores" For Underwriting Decisions As Sales Stall

So, what do you do when your sales are stalling because you've already financed new cars for every man, woman and child with a credit score north of 500?  Well, you simply abandon credit scores in the underwriting process and instead explicitly mandate that your loan officers approve every potential car buyer that walks through the door with a pulse. 

Maybe we're exaggerating a little, but according to a new report from the Wall Street Journal, Ford Credit "has decided to change its approval process to look beyond credit scores in an effort to pump up sales."  Which is a genius strategy if we understand it correctly.

The company says it is looking at ways to increase loan and lease approvals for applicants with limited credit histories. These consumers are often denied credit because they lack a history of managing debt and as a result have low credit scores. Ford’s credit division plans to review new data to try to determine whether these customers, as well as those with more robust borrowing histories, are likely to repay their loans.

The move by Ford Motor's financing unit is expected to unfold in coming years, even as concerns mount about rising auto-loan losses in the industry. Ford Motor Credit is expected to announce the plans as soon as Friday.

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What Financial Conditions Tell Us (Two Charts & A Prediction)

It seems every bank, including central banks, publishes a financial conditions index these days. And because financial conditions typically lead the economy, it makes sense to track them. In fact, they might contain even more information than they get credit for. They might offer the elusive “crystal ball” that foretells our economic fortunes.

Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below:

With one exception, all of the indicators measure a separate piece of the economy’s financial side. We add business earnings (the exception) because they interact closely with financial conditions. When earnings are healthy, stock prices and business credit conditions are usually healthy, too, whereas weak earnings usually weigh on stocks and credit.

Instead of melding the indicators into a single index, though, we think it’s more revealing to treat them individually. The chart below shows each indicator in the quarter before and the quarter of the last nine business cycle (BC) peaks, although with less data for lending standards, which the Fed began surveying for the first time in mid-1990.

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