Posts Tagged ‘deleveraging’

DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH

DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH

Courtesy of The Pragmatic Capitalist 

The following paper by Paul Krugman is an excellent analysis of the current situation in the United States.  Professor Krugman accepts Richard Koo’s “balance sheet recession” and draws similar conclusions to Koo – primarily that government must maintain large deficits in order to offset the lack of spending by the private sector.  The key component missing in both Krugman and Koo’s argument is the idea that a nation that is sovereign in its own currency cannot default on its “debt”.  Nonetheless, the conclusions we all come to are similar – a temporary deficit is not only necessary, but an economic benefit during a balance sheet recession:

“In this paper we have sought to formalize the notion of a deleveraging crisis, in which there is an abrupt downward revision of views about how much debt it is safe for individual agents to have, and in which this revision of views forces highly indebted agents to reduce their spending sharply. Such a sudden shift to deleveraging can, if it is large enough, create major problems of macroeconomic management. For if a slump is to be avoided, someone must spend more to compensate for the fact that debtors are spending less; yet even a zero nominal interest rate may not be low enough to induce the needed spending.

Formalizing this concept integrates several important strands in economic thought. Fisher’s famous idea of debt deflation emerges naturally, while the deleveraging shock can be seen as our version of the increasingly popular notion of a “Minsky moment.” And the process of recovery, which depends on debtors paying down their liabilities, corresponds quite closely to Koo’s notion of a protracted “balance sheet recession.”

One thing that is especially clear from the analysis is the likelihood that policy discussion in the aftermath of a deleveraging shock will be even more confused than usual, at least viewed through the lens of the model. Why? Because the shock pushes us into a world of topsy-turvy, in which saving is a vice, increased productivity can reduce output, and flexible wages increase unemployment. However, expansionary fiscal policy should be effective, in part because the macroeconomic effects of a deleveraging shock are inherently temporary, so the fiscal response need be only temporary as well. And the model suggests that a temporary rise in government spending not only won’t


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The Chances of a Double Dip

The Chances of a Double Dip 

Courtesy of John Mauldin at Thoughts From The Frontline 

I am on a plane (yet again) from Zurich to Mallorca, where I will meet with my European and South American partners, have some fun, and relax before heading to Denmark and London. With the mad rush to finish my book (more on that later) and a hectic schedule this week, I have not had time to write a letter. But never fear, I leave you in the best of hands. Dr. Gary Shilling graciously agreed to condense his September letter, where he looks at the risk of another recession in the US.

I look forward at the beginning of each month to getting Gary’s latest letter. I often print it out and walk away from my desk to spend some quality time reading his thoughts. He is one of my "must-read" analysts. I always learn something quite useful and insightful. I am grateful that he has let me share this with you.

If you are interested in getting his letter, his website is down being redesigned, but you can write for more information at insight@agaryshilling.com. If you want to subscribe (for $275), you can call 888-346-7444. Tell them that you read about it in Thoughts from the Frontline, and you will get an extra one month on your subscription. And now, let turn to Gary.

The Chances of a Double Dip

By Gary Shilling

Investor attitudes have reversed abruptly in recent months. As late as last March, most translated the year-long robust rise in stocks, foreign currencies, commodities and the weakness in Treasury bonds that had commenced a year earlier into robust economic growth – the "V" recovery.

As a result, investors early this year believed that rapid job creation and the restoration of consumer confidence would spur retail spending. They also saw the housing sector’s evidence of stabilization giving way to revival, and strong export growth also propelling the economy. Capital spending, led by high tech, was another area of strength, many believed.

Not So Fast

But a funny, or not so funny, thing happened on the way to super-charged, capacity-straining growth. In April, investors began to realize that the eurozone financial crisis, which had been heralded at the beginning of the year by the decline in the euro, was a serious threat to…
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Fed Z1: From Bad To Getting Worse

Fed Z1: From Bad To Getting Worse

Courtesy of Karl Denninger at The Market Ticker  

The new Z1 is out….

There’s a lot of mind-numbing figures and facts in here, but a few things stick out like a sore thumb. 

Let’s first start with the graphs, which I have updated.

 

Hmmm….. there’s a bit of a hook in there at the back end.  Where’s that coming from? 

 

Oh, that’s not so good.  Business credit is going up again a bit, and of course The Federal Government is pumping new credit like mad – but is no longer simply trying to compensate for de-leveraging, they’re exceeding that.

This is decidedly negative – in fact, it has the potential to lead to an economic death-spiral if the government doesn’t cut this crap out in time.

Some of the other nasties in here are truly stunning.  One of them is the ugly on Households – they lost a net $1.5 trillion in one quarter on their net wealth. 

The 900lb Gorilla in the room is found in real estate.  While we don’t have current numbers on that and won’t (the update is primarily equities) the ugly on the housing side is breathtaking.  From a peak in 2005 of $13.1 trillion in equity in residential real estate, that value has now diminished by approximately half to $6.67 trillion!

Yet outstanding household debt has in fact increased from $11.7 trillion to $13.5 trillion today.

Folks, those who claim that we have "de-levered" are lying.

Not only has the consumer not de-levered but business is actually gearing up – putting the lie to any claim that they have "record cash."  Well, yes, but they also have record debt, and instead of decreasing leverage levels they’re adding to them.

In short don’t believe the BS about "de-leveraging has occurred and we’re in good shape."  We most certainly have not de-levered, we most certainly are not in good shape, and the Federal borrowing is what, for the time being, has prevented reality from sticking it’s head under the corner of the tent.

This cannot and will not continue on an indefinite basis. 


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Are Bank Stocks Such a Good Buy?

Are Bank Stocks Such a Good Buy?

Courtesy of Yves Smith at Naked Capitalistm 

banks

A fund manager who will go unnamed mentioned to me that he is putting clients into bank stocks because they are trading at or below book value.

Now of course, individual stocks can and do always outperform the outlook for their sector, so there are no doubt particular banks whose stocks are cheap right now. But there are good reasons to question the notion that banks in general, and money center banks in particular, are a bargain.

First and perhaps most fundamental is the notion that bank equity is a readily-measured number, and that book value is therefore a useful metric. In general, even in companies in make-and-sell businesses, balance sheet items are subject to artful reporting. Notice, for instance, how every four or five years most big public companies take a writeoff that they classify as extraordinary, and equity shills dutifully exclude it from their calculation. In most cases, the writeoff is an admission that past earnings were overstated, but seldom is anyone bothered by what this says about the integrity of that company’s accounting or the acumen of its management.

Bank earnings, even under the best circumstances, involve a great deal of artwork, and most of all in the very big banks with large dealer operations. As Steve Waldman pointed out,

Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

Lehman is a case-in-point. On September 10, 2008, Lehman reported 11% “tier one” capital and very


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REGARDING THOSE “STRONG” CORPORATE BALANCE SHEETS

REGARDING THOSE “STRONG” CORPORATE BALANCE SHEETS

Courtesy of The Pragmatic Capitalist 

Calculator and pencil on top of balance sheet

Brett Arends had an excellent piece on MarketWatch yesterday regarding the true state of US corporations.  You’ve probably heard the argument before that corporations are sitting on record piles of cash – their balance sheets are in immaculate condition. Right?  Wrong!  These comments are generally made without accounting for both sides of the ledger.  What is often ignored is that the total debts of these companies has also skyrocketed.  Admittedly, I’ve been guilty of this in the past when discussing corporate cash levels and Arends (rightfully) sets the record straight.  He notes that corporations are even worse off today (in terms of debt levels) than they were when the crisis began:

“American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You’d think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have “record amounts of cash” in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don’t look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That’s up by $1.1 trillion since the first quarter of 2007; it’s twice the level seen in the late 1990s.”

This will also sound familiar to readers of John Hussman who has debunked the cash on the sidelines story more than once:

Interestingly, some observers lament that corporations and some individuals are holding their assets in “cash” rather than spending and investing those balances, apparently believing that this money is being “held back” from the economy. What


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David Tice Says Double-Dip Recession ‘In the Cards’ for U.S.

David Tice Says Double-Dip Recession ‘In the Cards’ for U.S.

Courtesy of Edward Harrison at Credit Writedowns 

David Tice, chief portfolio strategist for bear markets at Federated Investors Inc, talks about the outlook for the U.S. economy. He sees a double dip coming and argues against stimulus to prevent it, saying policy makers shouldn’t act as “Good Time Charlie” preventing the deleveraging of U.S. households. 


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Ten Reasons Why This Has Been A Weak Recovery

Ten Reasons Why This Has Been A Weak Recovery

9 Y/O BOY SICK IN BED WITH ICE PACK AND THERMOMETER

Courtesy of Edward Harrison at Credit Writedowns 

Comstock Partners latest weekly note called "Why it’s Still A Secular Bear Market" is in line with my view of the economy and market. They see the core issue as a longer-term deleveraging that cannot be solved by fiscal and monetary stimulus. I have said that this likely means lower inflation-adjusted stock prices when the stimulus-induced recovery fades. This is a view they also hold.

However, they also provide ten specific reasons why we should see the recovery as already under attack.

  1. While May retail sales were up 8% from the early 2009 low they are still 4.4% below the peak reached 2 1/2 years ago in November 2007. By way of comparison, over the last 43 years retail sales have seldom declined at all, even in recessions.
  2. May industrial production (IP) was 8.1%% over its June 2009 trough, but still 7.9% below the late 2007 peak. At its current level, IP is still where it was over 10 years ago in early 2000.. Never since the 1930’s depression has IP failed to exceed a level attained 10 years earlier.
  3. New orders for durable goods in April were up 21% from the low of March 2009, but still 22% below the top in December 2007. In fact new orders are at the same level as in late 1999, over ten years ago.
  4. Initial weekly unemployment claims steadily declined from 651,000 in March 2009 to 477,000 by Mid-November, but have been range-bound with no improvement in the last 6 ½ months. Furthermore the current number of claims is still in recession territory.
  5. April new home sales were up 14.8% from a month earlier and are up a seemingly robust 48% since the low. However, the current number is still a whopping 64% below the 2005 monthly peak. Prior to the current recession the last time new home sales were this low was in February 1991.
  6. Existing home sales in April were up 27% from the low in late 2008, but still 20% below the peak in late 2005. We also note that both new and existing home sales were boosted by the homebuyers tax credit that has already expired, and that the housing market has weakened considerably since that time.
  7. May vehicle sales of 11.6 million annualized were up


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Why The World Is Headed For A Balance Sheet Recession

"Balance sheet recession" explained.  It characterized the Great Depression and Japan’s Lost Decade, and includes weak consumer spending and private sector deleveraging.  During this process, the three Ds come into play: debt deflation, deleveraging, and ultimately depression. – Ilene 

Why The World Is Headed For A Balance Sheet Recession

Courtesy of Edward Harrison at Credit Writedowns 

In my post Koo, White, Soros and Akerloff videos from inaugural INET conference I highlighted four speeches from the recent George Soros-sponsored pow-wow. I have already written up a post based on the one by William White in "The origins of the next crisis."

This post serves to give you some colour on another of those speeches, the one by Richard Koo and his balance sheet recession.

 

Koo believes the US, Europe and China are headed for a period of incredibly weak consumer spending not unlike what Japan has been through. Let me say a few words about this balance sheet recession theme, private sector deleveraging, and the related sovereign debt crises. Then, at the bottom, I have embedded a recent paper of his which has a bunch of graphs that explain what Japan has been through as a cautionary tale for the global economy.

I have described Koo’s thesis this way:

Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade.  He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession


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IS THIS A “MAJOR MARKET TOP”?

Brilliant theories (e.g. Robert Prechter’s market thoughts) and perfect timing are two different things. Pragcap’s timing has been exceptional. – Ilene

IS THIS A “MAJOR MARKET TOP”?

Businessmen talking and gesturing

Courtesy of The Pragmatic Capitalist

A reader recently responded with several excellent reasons why this could be the formation of a major market top and what Robert Prechter referred to as the next leg down in the bear market.  Although I turned near-term bearish recently, I am not convinced that this is a major turning point.  In this piece I respond to “Our Man In NYC” and the reasons why I believe this is not a major market top, but more likely a correction within the uptrend:

Our Man In NYC:

Thanks for the great response.  I’ll give you my brief thoughts on each topic you touched on.

- CRE: Still a huge problem, but it’s a slow motion train wreck.  The majority of the troubles in CRE are spread out over the next 3 years and will hinder bank balance sheets, but won’t serve as the “all at once” wallop RRE was in 2008.

- RRE: I said that last years stability in housing was a head fake and I still think we’re heading lower, but the stimulus will continue to bolster prices in the near-term.  There will be one last surge in activity as the tax credit ends this year.  Late 2010 and 2011 has potential for substantial declines in residential as resets surge, foreclosures remain high, inventory remains high, stimulus ends and the laws of supply and demand reassert themselves after the government’s temporary price fixing.  The next leg down isn’t quite here yet.

- Sovereign Risk: Greece is getting bailed out in all likelihood, but all in all, another slow moving iceberg.  The S&P story on the UK is alarming.  As readers know, I think debt is why we’re ultimately still in a bear market, but it’s not a NEAR-TERM concern.

- Liquidity: The Fed remains accommodative.  China appears to be on the verge of a wind-down.  Alarming, but at 10.7% GDP I think investors will ultimately view the near-term downturn as a buying opportunity in emerging markets.   Stimulus and accommodative policies are nearing an end, but the process will remain lumpy as


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Moving away from stimulus happy talk to focus on malinvestment

Moving away from stimulus happy talk to focus on malinvestment

Courtesy of Edward Harrison at Credit Writedowns

Robert Stawell Ball (

For the period leading up to the panic last year, I had been warning of a rather severe recession. My view at the time was that what was needed was a realignment of America’s industrial organization away from finance and housing where serious overinvestment meant many firms would fail and asset prices would fall.This turned out to be an accurate view.

However, when Lehman Brothers collapsed in a heap, it was clear to me that we faced a stark choice.  One choice was a deflationary spiral and the associated economic dead weight loss of a non-equilibrating global economy in Depression.  The other choice was a soft depression cushioned by fiscal (and monetary stimulus). About a year ago I wrote an ode to Keynesian economics called Confessions of an Austrian economist in which I said that I choose fiscal stimulus to cushion the downturn and prevent a depressionary spiral.

The thinking was this: if government buoys the economy, the effects of deleveraging and the bankruptcy of large systemic players need not create a deflationary spiral that leads to a deadweight loss, social unrest or the usurping of democracy by populist autocrats.

But, I am going to move away from the happy talk about fiscal stimulus and re-focus on malinvestment (I have never really talked much about monetary stimulus as a solution).  I am sure many of you saw this coming when I wrote “Stop the Madness now!” last month and I have been signaling my realignment with posts like “A few thoughts about the limitations of government.”

The reason is simple: in theory, fiscal stimulus can cushion the downturn and hasten real recovery by preventing a spiral into a non-equilibrating economic state.  However, in practice, stimulus has been used as an excuse to maintain the status quo, prop up zombie companies and forestall the inevitable.  This only lengthens the downturn, misallocating even more resources to less efficient uses. And all of the worries I had about social unrest, populism, and protectionism are coming true nonetheless.

To be honest, I always knew that the fiscal stimulus game was fraught with risk. Politicians will always use…
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Phil's Favorites

Arrogance destroyed the World Trade Organisation. What replaces it will be even worse

 

Arrogance destroyed the World Trade Organisation. What replaces it will be even worse

As the public face of globalism, the WTO mobilised protesters. It’ll be replaced by the law of the jungle. fuzheado/Flikr, CC BY-SA

Courtesy of John Quiggin, The University of Queensland

In line with his usual practice, Australia’s Prime Minister Scott Morrison has backed Donald Trump over the World Trade Organisation, criticising of China’s status in it as a “developing country”.

Critics of the int...



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Zero Hedge

One Bank Finds Major Cracks In The Leveraged Credit Market

Courtesy of ZeroHedge View original post here.

In many ways, the fact that the leveraged loan market has been so remarkably stable, despite the occasional high profile blow up, in a time of relentless redemptions from loan funds which have seen weekly outflows for nearly one full year resulting in $22BN in outflows YTD...

...  coupled with dropping rates, both of which shrink the at...



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Kimble Charting Solutions

Apple Bullish Breakout Suggesting Tech Follows In Its Path?

Courtesy of Chris Kimble

Is Apple sending a bullish message to the overall Tech market? Sure could be

Apple (AAPL) is working on a breakout above last year’s highs at (1), after creating a series of higher lows over the past year.

Tech ETF QQQ has been a similar-looking pattern to Apple over the past few months, as it is near old highs while creating higher lows.

Is Apple’s upside breakout suggesting that QQQ will follow in its footsteps and breakout?

Str...



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Insider Scoop

How Much Litigation Risk Is Priced Into Johnson & Johnson?

Courtesy of Benzinga

Johnson & Johnson (NYSE: JNJ) just can't seem to shake its talcum powder problems.

On Friday, Johnson & Johnson recalled 33,000 bottles of baby powder after a bottle purchased online by the FDA tested positive to asbestos.

Last year, a jury awarded a group ...



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Digital Currencies

Five hurdles blockchain faces to revolutionise banking

 

Five hurdles blockchain faces to revolutionise banking

Shutterstock

Courtesy of Markos Zachariadis, Warwick Business School, University of Warwick

Blockchain is touted as the next step in the digital revolution, a technology that will change every industry from music to wast...



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Chart School

Gold Stocks Review

Courtesy of Read the Ticker

Gold stocks are swinging back forth between the range, and a break out swing higher is due. Gold stocks are holding a near perfect Wyckoff accumulation pattern. All should get ready to play this sector. Yet we must recognize that gold stocks are a one of the most crazy rides at the stock market fair, so play very carefully.

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GDX PnF chart from within the video

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Important channels around the HUI.
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The Technical Traders

Treasuries Pause Near Resistance Before The Next Rally

Courtesy of Technical Traders

Our research team believes the US Treasuries and the US Dollar will continue to strengthen over the next 2 to 6+ weeks as foreign market and emerging market credit and debt concerns outweigh any concerns originating from the US economy or political theater.  Overall, the major global economies will likely continue to see strength related to their currencies and debt instruments simply because the foreign market and emerging markets are dramatically more fragile than the more mature major global economies.

We believe the US Treasuries may surprise investors by rallying from current levels, near price resistance, to levels above $151 on the TLT chart. 

Our belief ...



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Lee's Free Thinking

Look Out Bears! Fed New QE Now Up to $165 Billion

Courtesy of Lee Adler

I have been warning for months that the Fed would need new QE to counter the impact of massive waves of Treasury supply. I thought that that would come later, rather than sooner. Sorry folks, wrong about that. The NY Fed announced another round of new TOMO (Temporary Open Market Operations) today.

In addition to the $75 billion in overnight repos that the Fed issued and has been rolling over since Tuesday, next week the Fed will issue another $90 billion. They’ll come in the form of three $30 billion, 14 day repos to be offered next week.

That brings the new Fed QE to a total of $165 billion. Even in the worst days of the financial crisis, I can’t remember the Fed ballooning its balance sheet by $165 bi...



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Biotech

The Big Pharma Takeover of Medical Cannabis

Reminder: We are available to chat with Members, comments are found below each post.

 

The Big Pharma Takeover of Medical Cannabis

Courtesy of  , Visual Capitalist

The Big Pharma Takeover of Medical Cannabis

As evidence of cannabis’ many benefits mounts, so does the interest from the global pharmaceutical industry, known as Big Pharma. The entrance of such behemoths will radically transform the cannabis industry—once heavily stigmatized, it is now a potentially game-changing source of growth for countless co...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

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Members' Corner

Despacito - How to Make Money the Old-Fashioned Way - SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic - to say the least - with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Still, the stock market has been better over the last 10 (7%) an...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

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