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Oops, It’s Starting, Says This Chart from the FDIC

Oops, It’s Starting, Says This Chart from the FDIC

And its eerie exhortations to the banks to prepare for a downturn to avoid “undue disruption to the financial system.”

The FDIC’s quarterly report on commercial banks and savings institutions was cited in the media mostly for the $56 billion in profits that FDIC-insured commercial banks and savings institutions made in the first quarter, which was up 27% from a year ago. An estimated $6.6 billion of the profits were due to the tax-law changes.

It remained mostly unmentioned that this increase in profits came after the huge charge-offs banks took in the fourth quarter mostly due to write-downs of tax assets, also a result of the new tax law. These write-downs slashed bank profits in Q4 to $25 billion, the worst quarter since the Great Recession.

Overall, Q1 was really exciting. Banks were firing on all cylinders, according to the FDIC: Net income jumped, loan balances rose, net interest margins improved, and the number of “problem banks” edged down. But worries are creeping up:

The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded by “reaching for yield” through investing in higher-risk and longer-term assets.

Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path.

The industry also must be prepared to manage the inevitable economic downturn, whenever it comes, smoothly and without undue disruption to the financial system.

I added the bold. This is a goodie. We had an “undue disruption to the financial system” during the last downturn, and we don’t want another one, the FDIC says.

“Undue disruption” would be when banks stop lending. That’s when credit freezes up in a credit-dependent economy. Everything comes to a halt. Paychecks start bouncing. So, don’t do that again.

…click on the above link to read the rest of the article…

Where the Debt Slaves Are the Most Vulnerable

Where the Debt Slaves Are the Most Vulnerable

This type of chart is trotted out constantly these days to show that American households are in fabulous shape when it comes to their ability to service their blistering record debts. The red line in the chart shows household debt-service payments (combined monthly payments on mortgages, credit cards, auto loans, and student loans) as a percent of disposable (after-tax) income. Since 1980, the ratio has ranged from 9.9% to 13.2%. It hit that top in Q4 2007 just before it all came apart. Ten years later, it was at 10.3%. Hence the conclusion that households won’t have any trouble servicing their record debts. In a moment, we’ll get to the trap in this conclusion.

The chart above also shows separately the mortgage-debt-to-disposable-income ratio (brown line) and the non-housing consumer-debt-to-disposable-income ratio (blue line). Both combined make up the red line.

These debt-service ratios are a function mostly of three factors: The dollar amount of the debt; the interest rate on that debt; and the amount of disposable income. The logic is that rising disposable income supports rising indebtedness.

The large decline of the debt-service ratio from the peak of 13.2% in Q4 2007 to the all-time low in the data of 9.9% in Q4 2012 was caused by several factors:

  1. Consumers “deleveraged” mostly by shedding their debts via defaults and bankruptcies.
  2. Homeownership dropped to lows not seen since the 1960s. As households became renters, their mortgage debts were eliminated.
  3. Mortgage debt plunged by $1.2 trillion, or by 11.3%, from $10.6 trillion in 2007 to $9.4 trillion at the end of 2014. It has since risen to $10.1 trillion.

…click on the above link to read the rest of the article…

Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

The ECB’s Negative Interest Rate Policy has been the funniest monetary joke ever.

The distortions in the European bond markets are actually quite hilarious, when you think about them, and it’s hard to keep a straight face.

“Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets,” Bloomberg wrote this morning, also trying hard to keep a straight face. As Italian bonds took a hit, “bond yields climbed to the highest levels in almost three years, while the premium to cover a default in the nation’s debt was the stiffest since October,” it said. “Investors fret the anti-establishment parties’ proposal to issue short-term credit notes – so-called ‘mini-BOTs’ – will lead to increased borrowing in what is already one of Europe’s most indebted economies.”

This comes on top of a proposal by the new coalition last week that the ECB should forgive and forget €250 billion in Italian bonds that it had foolishly bought.

The proposals by a government for a debt write-off, and the issuance of short-term credit notes as a sort of alternate currency are hallmarks of a looming default and should cause Italian yields to spike into the stratosphere, or at least into the double digits.

And so Italian government bonds fell, and the yield spiked today, adding to the prior four days of spiking. But wait…

Five trading days ago, the Italian two-year yield was still negative -0.12%. In other words, investors were still paying the Italian government – whose new players are contemplating a form of default – for the privilege of lending it money. And now, the two-year yield has spiked to a positive but still minuscule 0.247% at the moment. By comparison, the US Treasury two-year yield is 2.57% over 10 times higher!

…click on the above link to read the rest of the article…

Why I Think the Stock Market Cannot Crash in 2018

Why I Think the Stock Market Cannot Crash in 2018

But the crash-insurance policy is a one-time deal. And then what?

The 85% of S&P 500 companies that have reported earnings so far disclosed they’d bought back $158 billion of their own shares in Q1, according to the Wall Street Journal. The quarterly record of $164 billion was set in Q1 2016. If the current rate applies to all S&P 500 companies, they repurchased over $180 billion of their own shares in Q1, thus setting a new record:

At this trend, including a couple of slower quarters, S&P 500 companies are likely to buy back between $650 billion and $700 billion of their owns shares in 2018. This would handily beat the prior annual record of $572 billion in 2007. Here are the top buyback spenders in Q1:

  • Apple: $22.8 billion
  • Amgen: $10.7 billion
  • Bank of America: $4.9 billion
  • JPMorgan Chase: $4.7 billion
  • Oracle: $4 billion
  • Microsoft: $3.8 billion
  • Phillips 66: $3.5 billion
  • Wells Fargo: $3.34 billion
  • Boeing: $3 billion
  • Citigroup: $2.9 billion

Buybacks pump up share prices in several ways. One is the pandemic hype and media razzmatazz around the announcements which cause investors and algos to pile into those shares and create buying pressure. Since May 1, when Apple announced mega-buybacks of $100 billion in the future, its shares have surged 11%. The magic words.

Other companies with big share buyback programs have also fared well: Microsoft shares are up 14% year-to-date. And if buybacks don’t push up shares, at least they keep them from falling: Amgen shares are flat year-to-date.

Shares of the 20 biggest buyback spenders in Q1 are up over 5% on average year-to-date, according to the Wall Street Journal, though the S&P 500 has edged up only 2%.

Share buybacks also prop up prices because they create buying pressure by the company itself when it finally does buy the shares. This is the only entity in the market that doesn’t want to buy low.

…click on the above link to read the rest of the article…

The State of the American Debt Slaves, Q1 2018

The State of the American Debt Slaves, Q1 2018

After the party, the hangover.

Total consumer credit rose 5.1% in the first quarter, compared to a year earlier, or by $184 billion, to $3.824 trillion (not seasonally adjusted), according to the Federal Reserve. This includes credit-card debt, auto loans, and student loans, but not mortgage-related debt. That 5.1% year-over-year increase isn’t setting any records – in 2011, year-over-year increases ran over 11%. But it does show that Americans are dealing with the economy and their joys and woes the American way: by piling on debt faster than the overall economy is growing.

The chart below shows the progression of consumer debt since 2006. In line with seasonal patterns for first quarters, consumer credit (not seasonally adjusted) edged down from Q4, as the spending binge of the holiday shopping season turned into hangover, an annual American ritual:

Note how the dip after the Financial Crisis – when consumers deleveraged mostly by defaulting on those debts – didn’t last long. Over the 10 years since Q1 2008, consumer debt has now surged 47%. Over the same period, the consumer price index has increased 16.9%:

Auto loans and leases for new and used vehicles rose by 3.8% from a year ago, or by $41 billion, to $1.118 trillion.

It was one of the smaller increases since the Great Recession: The peak year-over-year jumps occurred at the peak of the new vehicle sales boom in the US in Q3 2015 ($87 billion or 9%). However, the still standing records were set in Q1 and Q2 2001 near the end of the recession, with each quarter adding around $93 billion, or 16%, year-over-year.

Loan balances are impacted by prices of vehicles, number of vehicles financed, the average loan-to-value ratio, duration of prior loans (when they’re paid off), and other factors. So this chart is not necessarily a reflection of how many new and used vehicles were sold.

…click on the above link to read the rest of the article…

Toronto’s Splendid Housing Bubble Turns to Bust

Toronto’s Splendid Housing Bubble Turns to Bust

Market freezes up at the top. Average price of detached house plunges C$175,000 in 12 months.

Home sales in the Greater Toronto Area (GTA), Canada’s largest housing market, and among the most inflated in the world, plunged 32% in April, compared to a year ago, to 7,792 homes, according to the Toronto Real Estate Board (TREB), a real estate lobbying group. The sales plunge affected all types of homes, even the once red-hot condos:

  • Detached houses -38.4%
  • Semi-detached houses -29.3%
  • Townhouses -22.1%
  • Condos -26.0%.

The sales slowdown was particularly harsh at the higher end: Sales of homes costing C$2 million or more collapsed by 64%. The market is freezing up at the top.

Prices follow volume. Both types of prices the TREB publishes – the average price and its proprietary MLS Home Price Index based on a “composite benchmark home” – fell from April last year. This is a confusing experience for the real estate industry, sellers, and buyers, since prices have ballooned for 18 years, interrupted by only one brief dip during the Financial Crisis, and the rule has been that prices will always go up and that you cannot lose money in real estate.

The average price in April for the Greater Toronto Area (GTA) plunged 12.3% year-over-year to C$804,584. A drop of C$113,600. By market:

  • In Toronto itself: -8.2% (-C$76,860) to C$865,817.
  • In the rest of the GTA without Toronto: -15.2% (-C$137,070) to C$767,359.

Detached houses – which are generally more expensive than other home types – got hit the hardest:

  • Detached houses -14.4% to C$1,030,103 (down by C$175,000)
  • Semi-detached houses -6.4% to C$792,385
  • Townhouses -7.8% to C$645,172
  • Condos +3.2% to C$559,343

While Condo prices still gained 3.2%, that gain was down from a 6.1% gain in March, and down from double-digit gains earlier.

…click on the above link to read the rest of the article…

Update on the Most Splendid Housing Bubbles in the US

Update on the Most Splendid Housing Bubbles in the US

Everything spikes.

Prices of houses and condos across the US surged 6.3% from a year earlier (not seasonally-adjusted), according to the S&P CoreLogic Case-Shiller National Home Price Index for February, released this morning. The index is now 6.7% above the crazy peak of “Housing Bubble 1” in July 2006 just before the hot air hissed out, and 47% above the bottom of “Housing Bust 1”:

Real estate is local though prices are also impacted by national and global factors — such as monetary policies and offshore investors who consider US housing as an asset class and escape route — as well as by local factors. Together they create local housing bubbles. As local housing bubbles accumulate, even as some housing markets remain in the doldrums, they turn into a national housing bubble, as depicted in the chart above.

The Case-Shiller Index is based on a rolling three-month average; today’s release is for December, January, and February. The index, based on “home price sales pairs,” compares the sales price of a house in the current month to the last transaction of the same house years earlier. The index then incorporates other factors and uses algorithms to arrive at a data point. The index was set at 100 for January 2000; so an index value of 200 means prices as figured by the index have doubled.

So here are the most splendid housing bubbles in major metro areas in the US:

Boston:

The Case-Shiller home price index for the Boston metro jumped 0.7% on a monthly basis, to a new record, after two months of increases that followed three declines in a row, that had followed a 22-month surge during which the index defied not only gravity but also normal seasonal variations. The index is up 5.7% from a  year ago. During Housing Bubble 1, from January 2000 to October 2005, the index had skyrocketed 82% before dropping. It now tops that crazy peak by 13%:

…click on the above link to read the rest of the article…

Canada Home Prices Fall from Year Ago for First Time since 2009

Canada Home Prices Fall from Year Ago for First Time since 2009

The magnificent house price bubble wheezes.

With 2017 mortgage pre-approvals having now expired, the first wave of buyers facing OSFI’s ground breaking mortgage regulations are being put to the test. The regulations, also known as B-20, require all borrowers to pass a stress test at an interest rate 2% higher than the qualifying rate.

Early symptoms appear rather obvious. National home sales slid for the month of March, falling 23% year over year, and pushing the average sales price down 10%. Overall, it was a bearish quarter for Canadian housing, first quarter sales fell 16% year over year.

Much of the declines were felt in the single family housing market in Vancouver & Toronto, with many buyers unable to qualify at the recently inflated prices. The average sales price of a single family home in Greater Vancouver now sits at C$1.6 million and C$1 million in the Greater Toronto Area (GTA).

Chief economist of the Canadian Real Estate Association, Gregory Klump, noted the squeeze as “tighter mortgage lending rules, which make it harder for home buyers to qualify for uninsured mortgages, are also shrinking the pool of qualified buyers for higher-priced homes.”

To little surprise this reflected in the national home prices across Canada. The Q1 2018 average sales price declined by 6.27% from Q1 2017. It was the first year-over-year percentage decline since Q1 2009.

The impact of the mortgage stress could become more apparent moving forward, particularly if borrowing rates continue to rise. As of today, a homebuyer hoping to purchase the typical home in Greater Vancouver (as per the MLS benchmark price of C$1.084M) would require a minimum down-payment of C$216,800 and a verified income of C$175,000, assuming a 5-year mortgage at a generous 2.99% interest rate.

…click on the above link to read the rest of the article…

 

Is the “Petro-Yuan” a Credible Challenge to Dollar Supremacy?

Is the “Petro-Yuan” a Credible Challenge to Dollar Supremacy?

Wolf Richter with Jim Goddard on This Week in Money:

China latest effort to get its currency to be used globally is the “petro-yuan.” Is it a credible challenge to the supremacy of the US dollar? If China dumped US Treasuries, what would that accomplish? And more…

Central banks around the world seem leery about the Chinese yuan. Read…  What Could Dethrone the Dollar as Top Reserve Currency?

How Much Are Banks Exposed to Subprime? More than we Think

How Much Are Banks Exposed to Subprime? More than we Think

Wells Fargo has $81 billion in exposure to loans that, on paper, it isn’t exposed to.

A couple of days ago, when I wrote about the soaring delinquency rates in subprime auto loans – the worst since 1996 – and the collapse of three specialized small subprime lenders, I stumbled over a special nugget.

One of the collapsed small lenders, Summit Financial Corp, when it filed for bankruptcy on March 23, disclosed that it owed Bank of America $77 million. This loan was secured by the auto loans Summit had extended to subprime customers, who’re now defaulting in large numbers. In the bankruptcy documents, BofA alleged that Summit had repossessed many of these cars without writing down the bad loans, thus under-reporting the losses and misrepresenting the value of the collateral (the loans). This allowed Summit to borrow more from BofA to fund more subprime loans, BofA said.

Summit is just a tiny lender and doesn’t really matter. But there are a whole slew of these nonbank lenders, specializing in auto loans, revolving consumer loans, payday loans, and mortgages. Some of these nonbank lenders specialize in “deep subprime.” And some of these lenders are fairly large.

Since the Financial Crisis, big banks have mostly avoided subprime lending. Instead, they’re lending to the companies that then provide financing to subprime customers. And BofA is finding out just how much risk it was taking with its loan to Summit that was secured by now defaulting auto loans that were secured by cars that, once repossessed, are worth only a fraction of the loan value when they’re sold at auction.

…click on the above link to read the rest of the article…

Toronto’s Epic Housing Bubble Turns to Bust

Toronto’s Epic Housing Bubble Turns to Bust

Prices of detached houses plunge C$207,000 from a year ago as sales collapse.

After having ballooned for 18 years with barely a dip during the Financial Crisis, Toronto’s housing market, Canada’s largest, and among the most inflated in the world, is heading south with a vengeance, both in terms of sales volume and prices, particularly at the high end.

Home sales in the Greater Toronto Area (GTA) plunged 39.5% in March compared to a year ago, to 7,228 homes, according to the Toronto Real Estate Board (TREB), the local real estate lobbying group. This was spread across all types of homes, even the formerly red-hot condo sector:

  • Detached houses -46.3%
  • Semi-detached houses -30.6%
  • Townhouses -34.2%
  • Condos -32.7%.

While new listings of homes for sale fell 12.4% year-over-year, at 14,866, they’d surged 41% from the prior month, and added to the listings of homes already on the market. The total number of active listings – new listings plus the listings from prior months that hadn’t sold or been pulled without having sold – more than doubled year-over-year to 15,971 homes, and were up 20% from February.

At the current sales rate, total listings pencil out to a supply of 2.1 months. The average days-on-the-market before the home is sold or the listing is pulled without having sold doubled year-over-year to 20 days. Both data points show that the market is cooling from its red-hot phase, that potential sellers aren’t panicking just yet, and that potential buyers are taking their time and getting more reluctant, or losing their appetite altogether, with the fear of missing out (FOMO) having evaporated.

Sales volume has been plunging for months while listings of homes for sale have also surged for months. Prices follow volume, and prices have been backing off, but in February they actually fell on a year-over-year basis, the first since the Financial Crisis, and in March, they fell more steeply. This is what the report called a “change in market conditions.”

…click on the above link to read the rest of the article…

Freight Costs and Volumes Surge, Inflation Fears Heat Up

Freight Costs and Volumes Surge, Inflation Fears Heat Up

February was off the chart.

“We are seeing an unprecedented rise in logistics costs,” General Mills CEO Jeff Harmening told the Wall Street Journal after the company reported earnings. Shares dropped 9% on Wednesday and another 2% on Thursday. They’re down nearly 40% from their peak in July 2016.

The Maker of cereals, Yoplait, and other packaged food brands said that freight costs have surged to near 20-year highs in February. Other packaged food and snack makers, including Campbell, Hershey, Mondelez International (Oreos, Newtons, Premium and Ritz crackers), Sysco, Tyson Foods, Hormel Foods and others have all warned about rising transportation costs. And they said they’d try to pass these transportation cost increases on to their customers.

And this is what has been happening in the transportation sector in the US: Shipment volumes by all modes of transportation combined — truck, rail, air freight, and barge — surged 11.4% year-over-year in February according to the Cass Freight Index. The index, which is not seasonally adjusted, hit its highest level for any February since 2006:

February is in the slow part of the year, and yet it was nearly on par with June 2014, at the seasonal peak, and the peak month since the Financial Crisis!

…click on the above link to read the rest of the article…

 

Then Why Is Anyone STILL on Facebook?

Then Why Is Anyone STILL on Facebook?

Where’s the panicked rush to “delete” accounts?

Things at Facebook came to a head, following the disclosure that personal data from 50 million of its users had been given to a sordid outfit in the UK, Cambridge Analytica, whose business model is to manipulate elections by hook or crook around the world, and which is now getting vivisected by UK and US authorities.

The infamous “person familiar with the matter” told Bloomberg that the Federal Trade Commission has opened an investigation into whether Facebook violated a consent decree dating back to 2011, when Facebook settled similar allegations – giving user data to third parties without user’s knowledge or consent. Bloomberg:

Under the 2011 settlement, Facebook agreed to get user consent for certain changes to privacy settings as part of a settlement of federal charges that it deceived consumers and forced them to share more personal information than they intended. That complaint arose after the company changed some user settings without notifying its customers, according to an FTC statement at the time.

If Facebook is found to be in violation of the consent decree, the FTC can extract a fine of $40,000 per day, per violation. Given the 50 million victims spread over so many days, this could be some real money, so to speak.

Facebook said in a statement, cited by Bloomberg, that it rejected “any suggestion of violation of the consent decree.” It also said with tone-deaf Facebook hilarity, “Privacy and data protections are fundamental to every decision we make.”

That Facebook is collecting every little bit of personal data it can from its users and their contacts and how they react to certain things, their preferences, their choices, physical appearance – photos, I mean come on  – clues about their personalities, and the like has been known from day one. That’s part of its business model. It’s not a secret.

…click on the above link to read the rest of the article…

 

 

US Gross National Debt Spikes $1.2 Trillion in 6 Months, Hits $21 Trillion

US Gross National Debt Spikes $1.2 Trillion in 6 Months, Hits $21 Trillion

These dang trillions are flying by so fast, they’re hard to see.

The US gross national debt jumped by $72.8 billion in one day, on Thursday, the Treasury Department reported Friday afternoon. This March 16 is a historic date of gloomy proportions, because on this date, the US gross national debt punched through the $21 trillion mark and reached $21.03 trillion.

Here’s the thing: On September 7, 2017, a little over six months ago, just before Congress suspended the debt ceiling, the gross national debt stood at $19.84 trillion.

In those six-plus months – 132 reporting days, to be precise – the gross national debt spiked by $1.186 trillion. I tell you, these dang trillions are flying by so fast, they’re hard to see. And we wonder: What was that? Where did it go?

Whatever it was and wherever it went, it added 6% to the gross national debt in just 6 months.

And with 2017 GDP at $19.74 trillion in current dollars, the gross national debt now amounts to 106.4% of GDP.

In the chart below, the flat spots are the various debt-ceiling periods. This is a uniquely American phenomenon when Congress forbids the Administration to borrow the money that it needs to borrow in order to spend it on the things that Congress told the Administration to spend it on via the appropriation bills. So that’s where we are, on this glorious day of March 16, 2018:

…click on the above link to read the rest of the article…

Despite Years of ECB’s QE (Ending Soon), Italy’s “Doom Loop” Still Threatens Eurozone Financial System

Despite Years of ECB’s QE (Ending Soon), Italy’s “Doom Loop” Still Threatens Eurozone Financial System

Even banks outside Italy have an absurdly out-sized exposure to Italian sovereign debt.

The dreaded “Doom Loop” — when shaky banks hold too much shaky government debt, raising the fear of contagion across the financial system if one of them stumbles — is still very much alive in Italy despite Mario Draghi’s best efforts to transfer ownership of Italian debt from banks to the ECB, according to Eric Dor, the director of Economic Studies at IESEG School of Management, who has collated the full extent of individual bank exposures to Italian sovereign debt.

The doom loop is a particular problem in the Eurozone since a member state doesn’t control its own currency, and cannot print itself out of trouble, which leaves it exposed to credit risk.

The Bank of Italy, on behalf of the ECB, has bought up more than €350 billion of multiyear Treasury bonds (BTPs) in recent years. The scale of its holdings overtook those of Italian banks, which have been shedding BTPs since mid-2016, making the central bank the second-largest holder of Italian bonds after insurance companies, pension funds and other financials.

But Italian banks are still big owners of Italian debt. According to a study by the Bank for International Settlements, government debt represents nearly 20% of banks’ assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign debt holdings that represent over 100% of their tier 1 capital (or CET1), according to Dor’s research. The list includes Italy’s two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier 1 capital. Also listed are Italy’s third largest bank, Banco BPM (327%), MPS (206%), BPER Banca (176%) and Banca Carige (151%).

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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