<blockquote>'More signs that the economy is actually
not all that well. It may yet recover on its own (believe it or not, but from a historical perspective the data in their totality are not yet
decisive), but we think this is a very low probability scenario at this stage. There is likely already way too much malinvested capital in need of a significant purge.
Moreover, the economy’s pool of real funding has in our opinion been under strain (of varying intensity) since at least the year 2000. Although the pool of real savings cannot be measured, we can make educated guesses about its state by inference from other data points. If money supply expansion in the US does slow down further (as we suspect it will), an economic bust will become a near certainty.'
- Acting Man,
Corporate Loan Charge-Offs and Delinquencies Surge, December 8, 2015</blockquote>
<blockquote>'..the most remarkable Credit slowdown unfolded during Q3 in Corporate borrowings. Corporate debt growth slowed to a 4.3% pace, about half Q2’s 8.8% (strongest since Q3 2013’s 10.1%). In dollar terms, Total Business Borrowings slowed to a seasonally-adjusted and annualized rate (SAAR) of $586bn, down from Q2’s $1.025 TN.
Total Non-Financial Debt growth slowed markedly to SAAR $871bn, the weakest Credit expansion since Q4 2009 (SAAR $686bn) and down from Q2’s SAAR $1.989 TN and Q3 2014’s $1.907 TN. It’s worth noting that the rate of Credit expansion during the quarter was less than half the $2.0 TN bogey that I have posited is required to sustain the Bubble and unsound economic expansion.
Importantly, the Credit slowdown exacerbates already acute system vulnerability to a securities market downturn. With debt market tumult and dislocation building, there will surely be further slowing in Corporate Credit. After the late-nineties boom, Corporate Credit slowed sharply in 2001 and 2002 - and was barely positive in 2003. After peaking at more than $1.1 TN in 2007, Corporate Credit growth was cut in half in 2008, before contracting $455 billion in 2009. Corporate Credit has a strong proclivity for boom and bust dynamics.
The downturn now enveloping Corporate Credit portends a contraction in corporate profits and an abrupt slowdown of income growth. A significant tightening in corporate Credit also has negative ramifications for stock buybacks, M&A and financial engineering more generally. Such a backdrop is negative for stock prices, and Q3 provided a glimpse of the feedback loop of tightened Corporate finance, weaker stock prices, declining household perceived wealth and economic vulnerability.
During Q3, Household (and Non-Profits) Assets declined $1.153 TN, or 1.1%, to $99.55 TN. With Household Liabilities expanding slightly, Household Net Worth declined $1.232 TN during the quarter. For perspective, Household Net Worth increased on average $1.838 TN over the previous 15 quarters. As a percentage of GDP, Household Net Worth declined from Q2’s 482% to 472%. After ending 2007 at 461%, Household Net Worth fell below 350% in early 2009. Household Net Worth closed out Q1 2015 at a record 486% of GDP. It’s worth noting that Households ended Q3 with Financial Assets at $68.925 TN, or 382% of GDP. This compares to 272% to end the eighties, 361% to end Bubble year 1999 and 366% to end 2007.
Rest of World (ROW) holdings of U.S. financial assets declined a notable SAAR $299bn, led by a SAAR $492bn drop in Treasury holdings. This was an abrupt reversal from strong (Trillion plus) annual growth in ROW holdings of U.S. assets over recent years. After expanding SAAR $705 billion in Q2, ROW holding of U.S. Bond’s increased only SAAR $21 billion during Q3. ROW holdings of U.S. equities contracted SAAR $100 billion. Q3 data may suggest waning demand for U.S. securities, or perhaps it reflects more globalized de-risking and de-leveraging pressures.'
- Doug Noland,
The Precipice, December 12, 2015</blockquote>
<blockquote>'Moreover, as we should have learned from the global financial crisis,
when the Fed holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low-quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed's mandate is really to support long-run employment and price stability, the
first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed's ability to promote yield-seeking speculation and malinvestment that only produces inevitable crises and weakens long-run U.S. economic prospects.
The fact is that a quarter-point hike comes too late to avert the consequences of years of speculation, and while the hike itself will have little economic effect, the timing is ironic because a recession is already likely. The main effect of a rate hike will be to add volatility to an already speculative and now increasingly risk-averse market. The Fed’s
real policy error, as it was during the housing bubble, was to hold interest rates so low for so long in the first place, encouraging years of yield-seeking speculation and malinvestment by doing so.
Some would argue that the Federal Reserve “saved” us from the global financial crisis. I couldn’t disagree more. My view is that the financial crisis was
caused because the Fed overly depressed interest rates in the early 2000’s, encouraging investors to reach for yield in mortgage securities. In response, poorly regulated financial institutions, with banks free from the constraints of Glass Steagall, and other institutions having inadequate capital requirements, created a huge mountain of new, low-grade mortgages in the frenzy to create more “product.” The easy lending created a housing bubble, but someone had to hold the mortgages when they went belly-up, and those holders were banks, insurance companies, hedge funds, and individuals. As the mortgages went into foreclosure, banks had to mark the value of those mortgages to market value on their books, to the point where the value of their assets was less than the value of their liabilities: insolvency.'
- John P. Hussman, Ph.D.,
Deja Vu: The Fed's Real "Policy Error" Was To Encourage Years of Speculation, December 14, 2015</blockquote>
<blockquote>'Among the things the EBA’s report apprises us of, is that European banks continue to be submerged in bad loans, in spite of all the bailouts and extend & pretend schemes that have been implemented in recent years.'
- Acting Man,
Europe’s Banks Are Still Drowning in Bad Loans, November 27, 2015</blockquote>
<blockquote>'The quality of the underlying data in the templates went through three rounds of checks and was not being questioned at all, an official close to the process said.
The error is embarrassing for the London-based EBA as it tries to maintain an influential role after the European Central Bank became the direct supervisor of top lenders in the 19-country euro zone last year.'
-
UPDATE 1-European banks regulator corrects capital adequacy numbers, November 25, 2015</blockquote>
Context<blockquote>
'..plutocratic, crony capitalism..''..virtually no one saw the deep structural impairment associated with the protracted Bubble..''..deflationary impacts..'</blockquote>