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China Vows More Stimulus With Economy On Verge Of Contraction

October 31, 2018

China Vows More Stimulus With Economy On Verge Of Contraction

Overnight, China revealed the latest confirmation that its economy is slowing more conventional wisdom realizes when the National Bureau of Statistics reported that the manufacturing PMI fell to 50.2 in October – on the verge of a sub-50 contraction – down from 50.8 in September and below the 50.6 estimate. It was also the lowest number since July 2016 with almost all sub-indexes showing weaker growth momentum. The NBS non-manufacturing PMI also missed, printing at 53.9, and declining from 54.9 due to the weaker services PMI.

Commenting on the report, Goldman said that “growth faced increased downward pressures in the manufacturing sector” and highlighting the continued decline of trade-related indexes, noted that “weaker external demand has possibly weighed on activity growth in the manufacturing sector.”  Meanwhile, weaker auto sales also translated into soft auto manufacturing activities and dragged on overall manufacturing growth.

Goldman also blamed “slower property transactions” for the drop in the services PMI, which was further impacted by the the drop in the stock market : the NBS observed that the October PMI reading for the securities industry was the lowest this year, excluding the Chinese New Year months.

But most importantly, Goldman – as well as most China watchers – took the report to indicate further accommodative policy would be ushered in by Beijing to support contracting economic growth (Goldman expects one more RRR cut before the end of this year).

Perhaps hearing this request, on Wednesday China’s leadership vowed that further stimulus is being planned to prevent the broad slowdown from taking hold. Admitting that Beijing’s cocktail of fiscal and monetary stimulus has been behind the curve, a Wednesday Politburo meeting chaired by the president said that “downward pressure” is increasing, and the government needs to take timely measures to counter this.

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The US Spent A Record $523 Billion On Debt Interest In Fiscal 2018

October 6, 2018

The US Spent A Record $523 Billion On Debt Interest In Fiscal 2018

Earlier this week, when the US closed fiscal 2018 on September 30, we reported that US gross national debt jumped by $84 billion on September 28, the last business day of fiscal year 2018; with this last push higher, total gross national debt in fiscal 2018 rose by $1.271 trillion to an all time record of $21.52 trillion.

What is more stunning, is that only six months ago, on March 16, it had for the first time risen above the $21-trillion mark, while a year ago, at the end of September 2017, it was just $20.2 trillion.

The reason for the soaring debt total is, of course, the runaway US budget deficit, which while providing a temporary sugar rush to the US economy comes at a cost of explosive debt. As a reminder, one month ago, the CBO revised its forecast, and now expects the deficit will approach $1 trillion by the end of this fiscal year or one year sooner than disclosed in the CBO’s most recent forecast; in April the agency didn’t expect the deficit to reach $1 trillion until 2020.

Many have asked if any of this actually matters in the grand scheme of things. Last week Bloomberg published a piece titled “Skyrocketing Deficit? So What, Says New Washington Consensus” which explained  that neither Republicans nor Democrats are bothered by the devastating long-term trajectory of US debt, effectively making deficit hawks an extinct species:

In both parties, deficit spenders are gaining ground. That makes Year Two of the Trump administration look increasingly like end-times if you are, for example, the Committee for a Responsible Federal Budget.

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Beware The Zombies: BIS Warns That Non-Viable Firms Are Crippling Global Growth

September 23, 2018

Beware The Zombies: BIS Warns That Non-Viable Firms Are Crippling Global Growth

Ten years after central banks unleashed a period of record low interest rates, the central banks’ central bank is warning that this may not have been the smartest move.

In the latest quarterly review from the Bank of International Settlements, the Basel-based organization that oversees the world’s central banks warned that decades of falling interest rates have led to a sharp increase in the number of “zombie” firms, rising to an all time high since the 1980s, threatening economic growth and preventing interest rates from rising.

Zombie firms are defined as companies that are at least 10 years old, yet are unable to cover their debt service costs from profits, in other words the Interest Coverage Ratio (ICR) is less than 1x for at least 3 consecutive quarters. These types of companies, which first gained attention in Japan decades ago and have since gained prevalence in Europe and, increasingly, the United States.  According to a second definition, a requirement for a “zombie” is to have comparatively low expected future growth potential. Specifically, zombies are required to have a ratio of their assets’ market value to their replacement cost (Tobin’s q) that is below the median within their sector in any given year.

According to authors Ryan Banerjee and Boris Hofmann, zombie firms that fall under the two definitions are very similar with respect to their current profitability, but qualitatively different in their profitability prospects, which may be a function of how central banks have “broken” the market.  Graph 1 below shows that, for non-zombie firms, the median ICR is over four times earnings under both definitions. As the majority of zombie firms make losses, the median ICRs are below minus 7 under the broad measure and around minus 5 under the narrow one, so this is hardly a surprise.

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Wasting the Lehman Crisis: What Was Not Saved Was the Economy

September 20, 2018

Wasting the Lehman Crisis: What Was Not Saved Was the Economy

Photo Source futureatlas.com | CC BY 2.0

Today’s financial malaise for pension funds, state and local budgets and underemployment is largely a result of the 2008 bailout, not the crash. What was saved was not only the banks – or more to the point, as Sheila Bair pointed out, their bondholders – but the financial overhead that continues to burden today’s economy.

Also saved was the idea that the economy needs to keep the financial sector solvent by an exponential growth of new debt – and, when that does not suffice, by government purchase of stocks and bonds to support the balance sheets of the wealthiest layer of society. The internal contradiction in this policy is that debt deflation has become so overbearing and dysfunctional that it prevents the economy from growing and carrying its debt burden.

Trying to save the financial overgrowth of debt service by borrowing one’s way out of debt, or by monetary Quantitative Easing re-inflating real estate, stock and bond prices, enables the creditor One Percent to gain, not the indebted 99 Percent in the economy at large. Therefore, from the economy’s vantage point, instead of asking how the banks are to be saved “next time,” the question should be, how should we best let them go under – along with their stockholders, bondholders and uninsured depositors whose hubris imagined that their loans (other peoples’ debts) could go on rising without impoverishing society and preventing creditors from collecting in any event – except from government by gaining control over it.

A basic principle should be the starting point of any macro analysis: The volume of interest-bearing debt tends to outstrip the economy’s ability to pay. This tendency is inherent in the “magic of compound interest.” The exponential growth of debt expands by its own purely mathematical momentum, independently of the economy’s ability to pay – and faster than the non-financial economy grows.

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Debt-Laden Canadians Struggling Amid Decade-High Monthly Payments

September 18, 2018

Debt-Laden Canadians Struggling Amid Decade-High Monthly Payments

Canadians are spending more of their monthly budget on servicing debt, according to Bloomberg, hitting highs not seen since late 2008.

The household debt service ratio — a measure of the share of income that goes toward paying interest and principal on mortgage, credit card and other types of debt — reached 14.2 percent in the second quarter, the highest level since the end of 2008. –Bloomberg

The spiking debt-service ratio follows four central bank interest rate hikes over the past 14 months, while borrowing costs are expected to rise again in October.

According to data released Friday by Statistics Canada, a larger percentage of Canadian income goes towards interest payments alone, at around 6.9% – the highest level in five years.

Elevated debt levels remain a vulnerability for the economy. Canadian households are the most leveraged in the Group of Seven, with total debt of about C$2.19 trillion ($1.68 trillion), or C$1.69 in debt for every C$1 of income. That jeopardizes the sector’s future contribution to real gross domestic product growth. –Bloomberg

Around 1.9% of Canadian growth were attributed to consumption spending last year, which is expected to fall to 1.2% by 2020 according to projections by the Bank of Canada.

Where do We go? Is Any Place Safe?

April 21, 2018

Where do We go? Is Any Place Safe?

Many people have written in asking the same question:

“My question is as follows. Since we are all connected in this world. Will there be any place at all that will not be affected by a WW3? “

So far, we do not see anywhere in the developed world that will be unaffected. That does not mean it would be destroyed, just impacted economically. We are running our models all the time waiting for a glimpse of such an indication. We will certainly let everyone know if the computer finds such a place. What it appears to be is the destruction of the West’s economy. This seems to be connected largely to the collapse of socialism and government promises. It even appears that many governments are deliberately trying to instigate a war that they can use as an excuse to suspend debt payments which would allow them to deny their fiscal mismanagement for decades.

The computer has been projecting the collapse in sovereign debt on a global scale. Anyone with half a brain can see something is seriously wrong that the national debts just keep growing and we borrow money endlessly with no intention of paying anything back. You have to be a full moron to have created such a system that never ends. Even without war, we are headed into a Sovereign Debt Crisis which is inevitable.

As I have stated, interest expenditure will exceed military spending in the USA in 2019.  We can see that the national debt as a percent of GDP has been steadily rising in a breakout mode since the low established during the 2nd quarter 2001.  We reached a 13-year peak during the 1st quarter of 2014 and bottomed again with the Economic Confidence Model the 3rd quarter 2015 (2015.75). We have rallied once again making new highs and we are headed for the next high in 2020. Thereafter, the turning points will be 2027 and 2038.

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DANGER AHEAD FOR U.S. GOVT: Unable To Service Debt As Interest Rates Surge

February 2, 2018

DANGER AHEAD FOR U.S. GOVT: Unable To Service Debt As Interest Rates Surge

The U.S. Government is in serious trouble when interest rates rise.  As interest rates rise, so will the amount of money the U.S. Government will have to pay out to service its rapidly rising debt.  Unfortunately, interest rates don’t have to increase all that much for the government’s interest expense to double.

According to the TreasuryDirect.gov website, which came back online after being down for nearly a month, reported that the average interest rate paid on U.S. Treasury Securities increased from 2.2% in November 2016 to 2.3% in December 2017.  While this does not seem like a significant change, every increase of 0.1% in the average interest rate, the U.S. Government has to pay an additional $20.5 billion in interest expense (based on the $20.5 trillion in total U.S. debt).

Already, the U.S. Government is off to a BANG as it’s interest expense paid for the first three months of the year increased to $147 billion compared to $139 billion in the same period last year:

This chart was taken directly from the TreasuryDirect.gov site, with my added annotations.  As we can see, the U.S. Government paid $126.5 billion to service their debt Oct-Dec 2015.  We must remember, the U.S. Government Fiscal period starts in October.  So, in just two years, the interest expense the U.S. Government paid for Oct-Dec increased more than $20 billion.  Now, what is interesting is that the average interest rate in Dec 2015 was 2.33%, but in Dec 2017 it was only 2.31%.  Thus, it was actually lower, even though the interest expense increased by $20 billion.

The reason for the $20 billion increase in the interest expense during Oct-Dec 2017 versus Oct-Dec 2015 was due to a more than $2 trillion increase in U.S. debt over that two-year period.  So, the U.S. Government will have a serious problem as interest rates really start to rise… and that doesn’t even include the continued increase in total U.S. debt.

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Debt Has No Consequences? Color Me Skeptical

June 10, 2017

Debt Has No Consequences? Color Me Skeptical

The entire status quo is based on the delusion that rapidly rising debt will never generate any negative consequences.

Here’s a chart of America’s national debt, extended a mere dozen years into the future: the current $20 trillion in debt will double to $40 trillion, and that assumes 1) trillions of dollars in private and local government pensions don’t implode and have to be bailed out by the federal government, a bail-out that will have to be paid by borrowing more money, 2) a recession doesn’t slash federal tax revenues, 3) Universal Basic Income (UBI) doesn’t become policy, adding $1+ trillion in additional borrowing annually–and so on.

Color me skeptical that doubling the debt in 12 years won’t have any negative consequences. Let’s start by noting that federal debt is only the tip of America’s total debt load, which is rising fast in all sectors: federal, state/county/city, corporate and household.

Total government, corporate and household debt soared from $15.5 trillion in 2000 to $41.1 trillion in 2016. (see chart below, courtesy of 720Global). If we extend this expansion another 12 years, we will have a total debt load in the neighborhood of $100 trillion by 2030. And that’s if the “recovery” news is all good.

The consensus is that all this debt will have no negative consequences because 1) interest rates will remain near-zero forever and 2) it’s all “investment”, right? Actually, no; the vast majority of this debt is consumption, not investment, or even worse, it simply services existing debt or funds speculative gambling (stock buybacks, etc.)

Recall that every debt is somebody’s asset. Debt jubilees sound great to debtors, but not so appealing to insurance companies, pension funds, mutual funds, etc. that own the debt and rely on the income from that debt to pay pensioners their pensions, settle insurance claims, etc.

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