Encore Une Fois

Yesterday's discussion of financial market versus real economy leverage prompted Macro Man to spend some time hanging out with FRED to do some digging.  What follows are the fruits of his labours.   Although he retains his caution not to expect daily updates henceforth, let's have a look at leverage encore une fois.

As a couple of commenters noted, overall leverage in the economy as measured by total liabilities as a multiple of GDP has steadily declined since the crisis, albeit while remaining at historically high levels:


The decline has been largely driven by two sectors.  The first of these is from households/nonprofits, which is unsurprising given the environment of tight credit conditions, uncertain employment prospects, and weak income growth that has prevailed since the crisis.



The second is equally unsurprising, given the nearly daily levy of fines and the 13,000-plus behemoth that is Dodd-Frank and its sundry legacy laws and regulations.   The authorities have stated that they don't want any financial sector institution to be too big too fail, an on an aggregate basis their plan is working.   Now about that credit creation to spur economic growth.....


Ah, but that doesn't tell the whole story now, does it?  As a number of commentators, including the Fed, has noted, nonfinancial corporate debt issuance has been "brisk."   How brisk?  Well, it's soared to all time highs as a percentage of GDP.  Last year alone, the stock of debt liabilities increased by $744 billion at the same time the sector was pushing through some $450 billion of stock buybacks.   Hmmm.....issuing debt to buy back stock.   If that isn't increasing leverage, Macro Man isn't sure what is.    On a macro basis, this is one of the reasons to be concerned about credit, even if there has yet to be a notable deterioration in credit quality.   Remember, folks, come the revolution someone is going to want to sell this stuff.....who's going to step up and buy?



The final sector worth highlighting is of course the Federal government, which has seen its liabilities grow by some 40% of GDP over the last six years.  Of course, the Fed and other central banks have taken down a decent slug of this issuance, and it is worth wondering what might happen if the improvement in the government's fiscal stance were to reverse.   Then again, such a reversal would probably come in the context of a weak economy, which itself would likely catalyze QE Googolplex or whatever the next round will be called.



While this little study isn't exactly rocket science, it is occasionally worthwhile to review slow-moving figures like this to ensure that they say what you think they should.   Specifically,  the expected deleveraging of households and banks is occurring apace (hence the Richard Koo 'balance sheet recession' concept), though corporate debt issuers continue to party like its 1999, if not 2006.  Again, this may not be particularly useful in timing an eventual crack-back in credit, but it does suggest that when such an episode occurs positioning will be just as important there as it is in many other markets these days.









 

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July 30, 2014 at 5:05 PM ×

It's possible that Dame Janet will also say "Encore Une Fois" today and instruct the FOMC to dance the Can-Can. Bulls imagine she will lift her petticoat for punters and kick up her heels, promising years and years of monetary easy virtue. Then again, if you watched the price action at the open today, perhaps not. We were sellers of the renewed surge in economic exuberance this morning.

We have been castigated many times here for our gloomy views of the US economy. Let's do the mathematics, then. After the 4% Q2 (likely to be revised downwards) due to the "consumer bounce" and "inventory rebuild" to recover from "weather", we are now at a net 1.0% GDP for the year to date, which is 0.25% annualized. If you tack on a couple of 2.5% growth quarters, you still get to only 1.5%. This is reality. You can have QE infinity and smoke anything you want but the demographics do dictate slow growth in the US.

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Leftback
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July 30, 2014 at 6:41 PM ×

US credit deterioration is real, it isn't just a case of some punters not fancying the HYG ETF. When default rates are at historic lows, there's only one way for the data to go:

Fitch: Jump in HY Default Rate

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Anonymous
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July 30, 2014 at 7:29 PM ×

It's going to take a lot more than CEOC with a recovery rate > 90% to dislodge the HY market. Yields may rise but I think the credit cycle is still very much alive.

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abee crombie
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July 30, 2014 at 8:43 PM ×

from an unknown uber bull (can you guess) Re; GDP

The hater community will now need to do some serious soul searching to find something to complain about on the US economic front. But even the new normal and secular stagnation crowds (who are not true haters but more like grumpy old folks) will need to come to grips with the first 6 handle on NOMINAL GDP since 2006. While we have had a number 4 prints on the real side in the last few years, the deflator was never cooperating to give us 6+ percent nominal growth - until now.

So it appears after all that QE can generate reflation, much to the chagrin of those who mistakenly thought the US was Japan. And more importantly, it appears that things just really aren't that different than they used to be on the real side of the economy. A 6 handle on nominal GDP is probably the best economic news we could have hoped for. And given that NOMINAL income growth ultimately drives NOMINAL asset price growth, this the best news spoos could have hoped for. Good luck trading.

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abee crombie
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July 30, 2014 at 9:25 PM ×

MM, to be fair, shouldnt we gauge US credit conditions by earnings

http://imgur.com/Hf3ZZZE

The way I see it is that for the most part corporate america is in good shape re: credit. There are pockets are filth which will get hammered when the cycle turns.

Leverage is always defined with 2 variables. So if you think earnings(profit margins) or asset values are inflated then the current leverage ratio may be overstating the reality

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Anonymous
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July 31, 2014 at 7:57 AM ×

The balance between debt capital v equity capital is a tricky one. Why not take advantage of almost free debt if you're a corp treasurer? I'd be filling my boots. On the opposite side of the ledger we have I believe record corporate cash holdings. So whilst I agree once we see the rate cycle normalise there will be problems at the lower end I don't see the total amount of corporate borrowings as inherently dangerous.

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Anonymous
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July 31, 2014 at 10:28 AM ×

C Says
Yes, well I'm sure the finer arguments are interesting enough from a nuanced viewpoint. However, it's always more important when you get to the counter party level. Whose holding what and what's going to happen when they have to sell. That's really what extremes in leverage are always about ,because they catch up all those people who at first blush you wouldn't think were exposed.

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amplitudeinthehouse
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July 31, 2014 at 1:37 PM ×

Quick summary, as I'm in the middle of studies, yep , those yennish fatigue cycles appear in football ratings too.
Anyway, I concur with the theme Macro Man has directed this blog of late, also agree it's not likely to be the sole indicator to help us pick a top though.
The fascinating question I keep asking myself is is when the top is in what is the expected percentage of decline and the length of time, as touch on , it's all about leverage , where is it and how sensitive will it be once exposed to selling.
The hedge funds that own swaths of RE maybe to big to care given the prices paid...there's smarter people than me that should know.
Governments will hibernate with bonds and etc.

Ps...MM & TMM , my holiday has been fantastic and I recently found out that you just can't go anywhere without bumping into those cretins that have had first dibs on you when it comes to telling stories about how well your Ping putter held up when putting for the tournament, well , it wasn't tournament, but it was a pretty big gallery anyway!


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Leftback
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July 31, 2014 at 1:44 PM ×

Price is News. Was that 4% GDP print really the best possible news for Spoos? Futures down this morning. Anyway, ├╝ber-bulls can enjoy that while we look at some fixed income opportunities.

Kevlar gloves at the ready for Banco Espirito Santo now that earnings are behind them? This is cheaper than cheap, assuming it is still going to be around. The history with banks is usually that someone blinks.

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abee crombie
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July 31, 2014 at 3:07 PM ×

LB, why not take the sub bonds instead. at 60 cents they are looking interesting. Say you get converted into equity, so that is a mkt cap of $400M... hmm

Eurostoxx looks like it is gonna take a big dump if we dont hold here

Meanwhile someone forgot to tell Asia... hmmm I smell some big rotation here

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Gnome of Zurich
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July 31, 2014 at 4:23 PM ×

LB, can you spare me some kevlar gloves and maybe some steel capped shoes as well? Got badly hit in BES today after taking their total exposure to the ES group declaration at face value. Maybe I should have accounted for the desperate founders family getting criminal at the end...

Sold out with a huge loss. I am now waiting for the recap, they need at least 2bln if not 3bln with a current 1.2bln market cap. I guess a heavier discount is in the making than today's price. But there's certainly a lot of value in there with 1bln of annual pre-provision income.

Now back to my banks in the _IGS.

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Anonymous
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July 31, 2014 at 6:37 PM ×

Ukraine stox up 44% YoY

http://imgur.com/2fTiQqq

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Anonymous
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July 31, 2014 at 7:01 PM ×

BES is toast. I wouldn't pay a single cent on the dollar for that worthless trash...

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abee crombie
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July 31, 2014 at 8:50 PM ×

BES reminds me of a friend buying Bear in 2007, "Common its Bear Sterns, its not like they are gonna go bankrupt tomorrow". bought in at $40 on friday. Monday it was $2.

Greetings from HYG. Time to start sniffing around for whats getting thrown out, but unless you wanna buy Russia I am keeping the kevlar secured so far

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Polemic
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July 31, 2014 at 9:26 PM ×

If I were Edward II then the man with the portable forge has entered the room and is poking the very hot coals with a poker whilst greeting me with a friendly "Ah, Eddie my old chum I've brought the barbecue but I seem to have dropped the sausages down the other side of the table , would you mind leaning over to get them for me? There's a good fellow"
I m looking forward to some tasty bbq'd chitterlings too.

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Anonymous
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July 31, 2014 at 9:37 PM ×

DB at new multi-year lows . Keep hearing whispers they could be key to the 'black swan'

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Anonymous
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July 31, 2014 at 9:46 PM ×

"Early Thursday, the Japanese investment bank sent out a note to clients recommending that they buy equity in Banco Espirito Santo SA."

"In an extra twist, earlier this month, the WSJ reported that Nomura demanded additional collateral or the repayment of a loan made to Espirito Santo International."

http://blogs.wsj.com/moneybeat/2014/07/31/nomuras-bes-misstep/

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