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.