Unparalleled Credit and Global Yields

By Doug Noland

Credit Bubble Bulletin: Unparalleled Credit and Global Yields

New Fed Q4 Z.1 Credit and flow data was out this week. For the first time since 2007, annual Total Non-Financial Debt (NFD) growth exceeded $2.0 TN – a bogey I’ve used as a rough estimate of sufficient new Credit to fuel self-reinforcing reflation. Based on some nebulous “neutral rate,” the Fed rationalizes that it’s not behind the curve. Robust “money” and Credit growth argues otherwise. A Bloomberg headline from earlier in the week: “Taylor Rule Suggests Fed is About 12 Hikes Behind.”

Though not so boisterous of late, there’s been recurring talk of “deleveraging” – “beautiful” and otherwise – since the crisis. Let’s update some numbers: Total Non-Financial Debt (NFD) ended 2008 at $35.065 TN, or a then record 238% of GDP. NFD ended 2016 at a record $47.307 TN, an unprecedented 255% of GDP. In the eight years since the crisis, NFD has increased $12.243 TN, or 35%. Including Financial Sector (that excludes the Fed) and Foreign U.S. borrowings, Total U.S. Debt has increased $11.422 TN to a record $66.079 TN, or 356% of GDP. It’s worth adding that the $2.337 TN post-crisis contraction in Financial Sector borrowings was more than offset by the surge in Federal Reserve liabilities.

For 2016, NFD expanded $2.117 TN, up from 2015’s $1.929 TN – to the strongest growth since 2007’s record $2.501 TN. Household borrowings increased $521bn, up from 2015’s $384bn, to the strongest pace since 2007’s $947bn. Household mortgage borrowings jumped to $248bn, up from 2015’s $129bn. On the back of an unusually weak Q4, total Business borrowings declined to $724bn last year from 2015’s $812bn (strongest since ‘07’s $1.117 TN).

The Bubble in Federal obligations runs unabated. Federal debt jumped $843bn in 2016, up from 2015’s $725bn increase to the strongest growth since 2013’s $857bn. It’s worth noting that after ending 2007 at $6.074 TN, outstanding Treasury debt has inflated more than 160% to $16.0 TN. As a percentage of GDP, Treasury debt increased from 42% to end 2007 to 86% to close out last year.

Yet Treasury is not Washington’s only aggressive creditor. GSE Securities jumped a notable $352bn in 2016 to a record $8.521 TN, the largest annual increase since 2008. In quite a resurgence, GSE Securities increased almost $1.0 TN over the past four years. Treasury and GSE Securities (federal finance) combined to increase $1.194 TN in 2016 to $24.504 TN, or 132% of GDP. For comparison, at the end of 2007 Treasury and Agency Securities combined for $13.449 TN, or 93% of GDP.

Continue reading Unparalleled Credit and Global Yields

Credit QE

By Jeffrey Snider of Alhambra

Although he didn’t state it specifically in his November 2010 Washington Post op-ed formally justifying QE2, it was very clear that then-Fed Chairman Ben Bernanke intended it to work through lending and especially the bank channel. Though he doesn’t explain, nor has any official ever, why a second one was needed given that the first was “quantitatively” determined, Bernanke was unusually clear about what he expected to happen for it:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.

If one is of the mood to be hugely charitable toward QE, you can claim that judging from this narrow benchmark it worked. According to the Fed’s Z1 statistics, bank lending resumed steady growth in Q2 2011. Since that quarter, the total of loans on the books of depository institutions has increased by 31%. It is unclear if QE was the motivation for that change, or perhaps it was the 2011 crisis which might have convinced banks to get out of the money dealing business so as to at least get back to the lending business, but again if we are being purposefully favorable we can attribute it to the Fed’s signature monetary policy.

It took a little while longer, and another two QE’s, for the other financial sectors to follow what banks were doing. The non-bank sector, after shrinking precipitously after the panic (Q3 2008), finally resumed positive numbers in the middle of 2013. Like the bank sector, it isn’t clear what motivated the change as that time period like 2011 was characterized by not just additional QE’s but also a great deal of financial turmoil.

The rest of the economy contributed positive loan growth in greater appreciation, though once again the inflection coincides with a prospective QE as well as a great many economic and financial questions (maybe lending doesn’t work the way it is theorized?).

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The Buford T. Justice Jobs Market

By Danielle DiMartino Booth

The Buford T. Justice Job Market, Danielle DiMartino Booth, Money Strong, Fed UpNever in the history of film making has artistic license paid off so handsomely

Of course, comic legend Jackie Gleason was no schlep in the world of thespians. Odds were high he would deliver a handsome return on stuntman cum director Hal Needham’s investment. And while it’s no secret there would have been no directorial debut for Needham had his close friend Burt Reynolds not agreed to be in the film, it was Gleason’s improvisation that made the Smokey and the Bandit the stuff of legends.

Though Gleason’s character’s name screams ‘surreal,’ the stranger than fiction fact is that Reynolds’ father was the real life Chief of Police in Jupiter, Florida who just so happened to know a Florida patrolman by the name of Buford T. Justice. The treasure trove of quotes from the film’s tenacious Texas Sherriff Buford T. Justice, who so tirelessly pursues the Bandit in heedless abandon over state lines, elicited nothing short of laugh-out-loud elation from anyone and everyone who has ever feasted on the 1977 runaway hit (it was the year’s second-highest grossing film after Star Wars).

Gleason’s most famous ad-lib moment occurs at a roadside choke-n-puke where Justice unwittingly strikes up a conversation with the same Bandit he’s chasing. “Let me have a diablo sandwich, a Dr. Pepper, and make it quick. I’m in a goddamn hurry,” Justice barks at a waitress after which point he explains to an innocent-faced Reynolds that he’s in such a hurry because he’s chasing a ‘maniac.’ As for yours truly’s favorite, there’s simply nothing funnier than Justice’s rant to his witless son: “There’s no way, no way, that you came from my loins. Soon as I get home, first thing I’m gonna do is punch yo mamma in da mouth.”

As much as Justice wants to score one for the good guys — “What we have here is a complete lack of respect for the law” — in the end, the ‘bad guy’ eludes capture. By the time the credits roll, the audience has no choice but to feel a little sorry for Justice and his habit of acting, and speaking, before he thinks, which inevitably leads to his downfall.

Continue reading The Buford T. Justice Jobs Market

“I think it’s safe to say everyone will take a glass half-full approach”

By Heisenberg

It’s all in the spin.

As Bloomberg’s Richard Breslow wrote overnight, markets are prone to taking a “glass is half-full” approach these days when it comes to incoming data, as evidenced by the apparent emphasis on the bolded passage below and not so much on the not bolded passage:

  • China Feb. Consumer Prices +0.8% Y/y; Est. +1.7%
  • Feb. PPI +7.8% y/y; est. +7.7% (range +6.5% to +8.1%, 42 economists); Jan. +6.9%

This is the attitude traders will carry into the ECB meeting and to be sure, investors can point to Wednesday’s blockbuster ADP print as evidence that it’s the right attitude to have. Hopefully Friday’s NFP print will lend further support to the rosy narrative.

Still, there are signs that things may be coming apart. As I noted yesterday, HY is starting to wobble and the whole reflationary meme is undercut to a certain extent by plunging copper and, more recently, crude prices.

In any event, below find Breslow’s latest in which the former FX trader notes that grasping at reflationary straws isn’t “necessarily a bad thing if it’s based on an evolving interpretation of the global economy and not merely on a re-assessment of central bank reaction functions.”

Via Bloomberg’s Richard Breslow

Well, it’s a good one-two punch to finish off the week, with the ECB today and non-farm payrolls tomorrow. I think it’s safe to say that given the current mood among traders, they will be squarely focused on the glass half-full elements rather than grasp at signs for temperance.

  • That’s not necessarily a bad thing. If it’s based on an evolving interpretation of the global economy and not merely on a re-assessment of central bank reaction functions. And, to be fair, and relieved, the data has been better
  • The improvements in activity aren’t localized, as patches of improvement have been in the recent past. The Citi global economic surprise index is riding at pretty exalted heights. In short, things are better than forecasters expected them to be. And explains the rather chuffed mood which has galvanized the FOMC to see an opportunity and take it
  • You can witness the current animal spirits in how today’s China inflation numbers were perceived. The stronger — by a little — PPI grabbed the headlines, while the big miss in CPI, core and headline, were put off as a Chinese New Year distortion. Even if that isn’t borne out in the details. It’s the reflation argument that everyone is pointing to, with sovereign yields across the region taking it to heart
  • Which brings us to what parts of President Draghi’s message will traders hear? Undoubtedly the elimination of “or lower” after “rates are expected to remain at current levels” will be over-analyzed. Pleasing Yves Mersch may be part of Draghi’s consensus-building strategy, but not going to ultimately dictate policy
  • The expected upgrades to headline inflation and growth will garner big headlines, but this one mandate council can’t ignore the fact that core inflation is nowhere
  • At their last meeting they talked about the capital key and purchases below the depo rate. Is it really likely that they will over-optimistically follow the Fed’s lead and abruptly shift from dovish to a tapering discussion? Yet, not a few people think so. Positions speak louder than reality
  • We spend a lot of time talking about the effects on Fed decision-making in front of the French election. Yet oddly enough, the hawks think the ECB will be playing the base case, throwing caution to the wind on peripheral spreads
  • In the aftermath, a close below 1.0490 in EUR/USD will get the bears salivating. Back above 1.0640 and the charts will scream “failure”. As for the bunds, 40bp and 30bp yield extensions will both look like break-outs

Manufacturing Back to 2014

By Jeffrey Snider of Alhambra

The ISM Manufacturing PMI registered 57.7 in February 2017, the highest value since August 2014 (revised). It was just slightly less than that peak in the 2014 “reflation” cycle. Given these comparisons, economic narratives have been spun further than even the past few years where “strong” was anything but.

The ISM’s gauge of orders increased to the highest level in just over three years, while an index of production posted its best reading since March 2011. The data were preceded by recent regional indicators showing similar strength that has prevailed since the presidential election as companies begin to step up investment and the global economy stabilizes.
“Things look good at this point,” Bradley Holcomb, chairman of the ISM survey committee, said on a conference call with reporters. “I don’t see anything here, or in the winds, that would suggest we can’t continue with this kind of pace going forward in the next few months.”

The comparisons to 2014 should instead induce caution. In terms of sentiment, there was nothing in those 2014 PMI’s to suggest what was about to happen. There was, however, in terms of so-called hard data of accounts like durable goods and factory orders.

Like the ISM PMI, factory orders in January 2017 (+5.5% Y/Y) rose at the fastest pace since 2014. It seems to be confirmation that the manufacturing sector has not only moved past the 2-year long manufacturing recession but may actually be breaking into full growth. That idea, however, is easily dispelled by those very comparisons to 2014 rather than 2011 (or before). In other words, while the growth rate of 5.5% might sound impressive given the steady low-scale contraction of those two years, it represents growth at the post-2012 pace rather than growth at a normal pace (therefore “not growth”).

It’s as if the “rising dollar” manufacturing contraction ended and the factory sector simply resumed its lackluster expansion as it was before it. That’s not how this is “supposed” to work, where the economy or any important sector falls off for years at a time and then just goes back to as before. There is typically symmetry to these processes, where after contracting for so long that sector will rapidly expand to something more like normal.

Continue reading Manufacturing Back to 2014

Fiscal Stimulus Will be Starting From Less Than Zero

By Jeffrey Snider of Alhambra

For a “reflation” regime predicated as much on government spending, it was an inauspicious start. Construction spending fell sharply in January, as lackluster growth in the private sector could not offset sharp declines in government activity. At the state and local level, construction spending fell nearly 5% from December (seasonally-adjusted), while at the federal level spending dropped more than 7%.

There isn’t any great mystery here as to why that was, since particularly federal activity was accelerated to as much before the Presidential election as possible. Public spending has been declining since November, after rising August to October (even though, as a whole, government construction had been weak and falling since the middle of 2015). From CNBC:

U.S. construction spending unexpectedly fell in January as the biggest drop in public outlays since 2002 offset gains in investment in private projects, pointing to moderate economic growth in the first quarter.

In addition to concerning real PCE growth also for January in figures also released yesterday, it was this drop in construction that led to a sharply lower prediction for Q1 GDP from the Atlanta Fed as well as throughout what is left of research on Wall Street. But it is not really the government end of things that is of concern.

Total private construction was up 7.2% year-over-year, which while sounding adequate is actually a little more than half the rate from earlier in 2016. In the middle of 2015, just as “global turmoil” was to hit, private construction spending had gained 18% Y/Y that August (after growing at 20+% rates in early 2014). While the nadir of that downward trend for construction spending seems to have occurred around September, as with so many other economic accounts the lack of determined acceleration stands out.

On the private side, this is primarily attributable to the residential segment. Residential construction grew by just 5.3% in January after rising 6.4% in December. As late as August 2015, activity on the housing side was growing by more than 20%.

Continue reading Fiscal Stimulus Will be Starting From Less Than Zero

Bank Deregulation is Less Important Than Bank Credit

By Steve Saville

Asset prices, most notably stock prices, are now supported by nothing other than the creation of credit and money out of ‘thin air’

In response to the 2007-2009 financial crisis, policy-makers in the US who had absolutely no idea what caused the crisis enacted legislation that would supposedly prevent such a crisis from re-occurring. The legislation is called “The Wall Street Reform and Consumer Protection Act”, although it is better known as “Dodd-Frank”. Unsurprisingly, considering its origins, the Dodd-Frank legislation has done nothing to reduce financial-crisis risk but has made the US economy less efficient. Quite rightly, therefore, the Trump Administration is intent on repealing all or parts of it. What are the likely consequences?

If Dodd-Frank were scaled back in a meaningful way it could make interactions between customers and their banks more efficient, but without knowing exactly which parts of the legislation are going and which parts are staying it isn’t possible to quantify the consequences. For example, a part of the legislation that will probably go is the requirement for banks to retain at least 5% of any loans they securitise. Eliminating this requirement would be slightly helpful to banks, but would make very little difference to the overall economy.

What we can say is that the efficiency-related benefits of meaningfully scaling back Dodd-Frank would be long-term, meaning that they probably wouldn’t have a noticeable effect over the ensuing year.

As an aside, it’s worth mentioning that there is a risk associated with eliminating parts of the economy-hampering legislation known as Dodd-Frank. The risk is that de-regulation will get the blame when the next crisis occurs, and the Federal Reserve, the primary agent of economic instability, will again get away unscathed.

With regard to economic performance over the next 12 months, changes in the pace at which US banks collectively expand credit will likely be of far greater importance than changes in how the US banking industry is regulated. From a practical investing/speculating standpoint it therefore makes more sense to focus on the following chart than on the latest Dodd-Frank news.

The chart shows that after oscillating in the 7%-8% range for about 2 years, the year-over-year (YOY) rate of credit growth in the US banking industry has slowed markedly of late. As recently as late-October it was above 8%, but it’s now around 5.4%.


The steep decline in the rate of bank credit growth during 2013 didn’t have any dramatic economic consequences, but that’s only because the Fed was rapidly expanding credit via its QE program at the time. With the Fed no longer directly adding credit and money to the financial system, keeping the credit-fueled boom alive depends on the commercial banks. In particular, there’s little doubt that a further significant decline in the rate of commercial-bank credit growth would have a noticeable effect on the economy.

On a long-term basis the effect of a further decline in the pace of credit expansion would actually be positive, but on an intermediate-term basis it would be very negative because many activities and asset prices, most notably stock prices, are now supported by nothing other than the creation of credit and money out of ‘thin air’.

What Trump Won’t Tell You About Illegal Immigrants and the Economy

By Heisenberg

One of the great things about having an intelligent, articulate, and cultured leader is that it reduces the need for the electorate to conduct their own due diligence on the issues that matter.

Illegal immigration is a great example. It’s a complex issue that has implications for the economy, demographics, and society in general. Fortunately, Donald Trump has come up with a handy Cliffs Notes guide as it relates to Mexican immigrants.

You can delve into the boring statistics if you like, but why waste your valuable time when there are only three things you really need to know? To wit, from the leader of the free world:

There you go. Everything you need to know about immigration in 9 seconds.

Now I don’t know why, but it turns out some folks are interested in finding out if there’s more to the story than that.

Folks like the economists at BofAML.

Continue reading What Trump Won’t Tell You About Illegal Immigrants and the Economy

When Inequality Goes Corporate

By Heisenberg

One of the oft-cited reasons for the populist fervor that swept Donald Trump into the White House and now threatens to push Europe into a kind of neo-nationalist hell complete with institutionalized xenophobia and massive sovereign defaults (in the event of redenominations), is creeping inequality.

The “downtrodden masses” aren’t properly represented and they need a voice. Or so the story goes (never mind the absurdity of that “voice” emanating from a braggadocious billionaire who quite literally constructs golden monuments to himself).

This inequality shows up in charts like these, from Goldman:



Well as it turns out, inequality and the plight of the “little guy” doesn’t just apply to people. As SocGen writes in a new piece out Monday, “increasingly the concept of inequality is starting to be applied within the corporate world.”

Here’s are some short excerpts and two charts for you to consider.

Via SocGen

The topic of wealth inequality is being increasingly applied to the corporate world. The largest companies are seen as being so powerful and profitable that they suppress competition, depress wages and generally make the process of wealth distribution uneven. There appears to be a case. While margins at the average US company have been under pressure, the most successful US stocks have sustained their profitability and been afforded ever higher valuations in the process. Numerous studies seek to show US industry concentration to be intensifying around a few key firms. Critics also highlight the lack of new firm creation and point to record low levels of IPO activity in recent years as indicators of stifled entrepreneurship.


Smaller company performance has been challenging and an equal-weighted universe of S&P 500 stocks has systematically outperformed average US companies from 2003 onward, indicating that the smaller companies were struggling versus the biggest stocks long before quantitative easing, the financial crisis and the rotation from active to passive. In recent years this performance gap has widened. Worryingly those small caps appear to be also embracing leverage in an attempt to narrow the gap


Bi-Weekly Economic Report

By Joseph Calhoun of Alhambra

Economic Reports Scorecard

The economic data released since my last update has been fairly positive but future growth and inflation expectations, as measured by our market indicators, have waned considerably. There is now a distinct divergence between the current data, stocks and bonds. Bond yields, both real and nominal, have fallen recently even as stocks continue their relentless march higher. The incoming, current data seems to support the notion of better growth but falling rates – real rates are negative out to at least 5 years now – point to, at best, a continuation of the weak, 2%ish growth we’ve been getting for the last several  years. The Chicago National Activity Index, released last Thursday, confirms that diagnosis, coming in at -0.05. a reading guaranteed to frustrate bulls and bears alike.

Continue reading Bi-Weekly Economic Report