An update on leverage (sort of)

Following on from a conversation that he had over the weekend, Macro Man got to thinking about a post he did last summer on the financial leverage in various segments of the US economy.  He thought it would be useful to update the charts with another couple of quarters' worth of (presumably leverage-enhancing) data, and so he did so.

Alas, it appears that there has been a substantial benchmark revision to the flow of funds data, as updating the feed from FRED led to a radical shift in the data pulled for one key segment of the economy- nonfinancial corporate business.

To be sure, overall leverage looks broadly similar when expressed as a percentage of GDP; it peaked during the crisis and has been steadily receding since, albeit at levels that are still eye-watering by historical standards.  Overall, the revisions were fairly modest, but pointed to a bit less leverage than previously thought.


Households continue to delever, aided by low rates and, recently at least, low oil prices.  This trend has continued since the previous update; judging by the tepid tone of retail sales recently, little has changed.

So, too, is the drill with financial corporations, as anyone currently or formerly employed by a bank, or seeking to use the balance sheet of such an institution, can attest.  At least the regulators must be happy....


Obviously, the Federales have taken up the slack as households and banks delever- clearly, little has changed about the stock of Treasury debt over the last couple of quarters.


Which brings us to nonfinancial corporates, the starting point of this analysis.  In the original post, corporate business was notable for increasing its stock of liabilities as a percentage of GDP to record highs.   This kind of made sense, with rates low, earnings yields high, and demand for corporate credit brisk, it was a perfect opportunity to gear the balance sheet a bit to increase EPS through buybacks (as well as stuff like pay for the fracking infrastructure.)

Macro Man was keen to see what the Z1 had to say about the increase in the middle of last year, when he saw this...


The whole narrative was sacrificed on an altar of data revisions.   If anyone who's been parsing the figures (which admittedly came out a couple of months ago- your author's been a bit slow to update this) has a good explanation, Macro Man would love to hear it.

In the meantime, it's hard to know what to make of this, as the magnitude of the revision renders the data literally unbelievable.  As the saying goes, there's lies, damned lies, and statistics.....
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CV
admin
February 18, 2015 at 7:48 AM ×

MM! Thanks a lot for bringing this above the parapet! I have been scratching my head endlessly over this.

The key culprit is in the SIFMA data I think. This data set used to show that the stock of non-financial debt had surpassed the stock of mortgage debt. Non anymore ... hmm. My working assumption in this cycle was that non-fin corp debt was the key to watch for a blow-out bubble. This assumption has just been revised away!

The proverbial we needs to get to the bottom of this!

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Anonymous
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February 18, 2015 at 12:32 PM ×

I think this is the revision?

http://www.federalreserve.gov/releases/z1/z1_technical_qa.htm#z19

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Bruce in Tennessee
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February 18, 2015 at 1:41 PM ×

http://www.rttnews.com/2458094/swiss-zew-economic-expectations-fall-sharply-in-february.aspx

Switzerland's economic expectations logged its sharpest decline in the survey history, data from Mannheim-based Centre for European Economic Research (ZEW) and Credit Suisse showed Wednesday.


....Do they get a medal?

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CV
admin
February 18, 2015 at 1:41 PM ×

Thanks anon, I just find it difficult to believe that redemptions have washed way the entire incremental increase 2001!!!

Ah well, if this is indeed true, you should be buying US HY with both hands ... and feet!

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Leftback
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February 18, 2015 at 4:56 PM ×

Thanks, MM. The household data does confirm one's personal observations that US consumers have been using petrol savings to pay down debt, and that the consumer deleveraging has continued since the crisis.

A special Knob of the Day award here to Joseph Adolfini of MW.com, who wrote an article on the Greek yield curve and linked to the 2y and 10y.

How Do You Say Inverted Yield Curve? Try Using the Correct Data, Knob-Job

Sadly, the data included are for Schatz and Bund !! Look, Joseph, Ze Germans are those guys over there with the low or negative yields, represented by the lady with the small painted on Adolf Hitler moustache wearing the jack boots.

[Joseph: you do know what Schatz and Bund are?]

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Anonymous
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February 18, 2015 at 5:05 PM ×

You see Joseph, the letters "DE" at the end of the "TMBMKDE-02Y" on your Bloomberg, that stands for DEutschland, see, which is German for Germany, not Greece. Amazing, eh?

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Polemic
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February 18, 2015 at 6:00 PM ×

No. Knob of the day goes to CNBC and Jeff Kilburg for the headline 'chicago trader says oil to go down 6% at least' http://www.cnbc.com/id/102431594

A person says oil to go down 6% is not news. Especially when its whanging around 4% either way a day.

huurumph .. Pol

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Mr. T
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February 18, 2015 at 7:56 PM ×

The fed seems terrified of spooking markets. It's really quite odd - what specifically are they afraid of? Rates are unlikely to shoot higher. Stocks are at all time highs. Corp issuance is robust. Unemployment is below targets. DXY is stable. Election uncertainty is still a ways off. Europe is Europe. From the notes:
Participants discussed the economic conditions that they anticipate will prevail at the time they expect it will be appropriate to begin normalizing policy. There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take.

I read this as a response to something along the lines of "what are you waiting for"? I don't know - market reaction seems to be neutral, but this seems a little more hawkish than I expected.

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Anonymous
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February 18, 2015 at 9:29 PM ×

Apparently they see some risks that we do not see. Or they are under a lot of outside pressure not to crash the party.

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Anonymous
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February 18, 2015 at 9:58 PM ×

7 years after the the financial crisis all central banks are all in at ZIRP or NIRP and are terrified to normalize rates.

When will this stop?

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Anonymous
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February 18, 2015 at 10:28 PM ×

@Pol. Yesterday's CL rally was options expiry. Volatility certainly picked up which is much more preferable to the one way direction. Another huge API build of 14.3 mln. Won't be surprised to see that base retested.

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Anonymous
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February 19, 2015 at 1:57 AM ×

via Yield Curve @TenYearNote ·
"Visual depiction of how US dollar credit has expanded to non-banks outside the United States. The squeeze is on "

https://twitter.com/TenYearNote/status/568102390756294656

Click on charts to expand

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Nico G
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February 19, 2015 at 6:53 AM ×

Kaminsky:

But the key point the authors were making, which continues to be ignored by the world and his dog, is that the primary source for most of the world’s external dollar debt has been non-US banks operating outside the US, which have trillions of dollars of deposits for swapping into other currencies for and non-US asset managers sitting on similarly large levels of dollar assets.

This, in their opinion, totally undermines the popular theory that the Fed’s large-scale asset purchases inject liquidity into banks in the US, which they in turn extend to offshore banks, which lend the dollars further.

This, de facto implies that the vast majority of the external dollar debt position is funded by an independent dollar float that sits separate to the US dollar system, but which depends on trade flows from the true US dollar system to be funded.

To us, that suggests the more QE the US did without issuing a commensurate amount of its own debt because of, you know, debt ceiling, the more it encouraged the external US dollar float to be relent multiple times (fractional reserve style) abroad before finally being soaked up by the sort of SWFs that would reinvest that float in US domestic assets.

But we’re now at a point where, unless all those external debtors have an organic way to keep dollars flowing into their coffers — i.e. without dependence on financing from non-US dollar pool sources — the value of all those loans, as well as the external US dollar pool itself, could quite abruptly and violent collapse in value.

> in other words, leverage has found another way to explode out of control (offshore)and no lesson has been learned from 2008.

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