Another short term money market indicator

I recently posted about the TED spread and how it had been marching higher (Murphy's law struck of course and it promptly reversed course right after I mentioned it.)

Zerohedge recently posted about a similiar money market stress indicator in the Chinese banking sector that bears watching.  If you want to look at the 1 month Chinese interbank lending rate in there future, here's the direct Bloomberg link

Total consumer debt continues falling

The Federal Reserve recently published the updated total consumer debt statistics.  Total consumer debt continues contracting and shows no sign of slowing its rate of decline.

As I have implied throughout my posts I believe we are in a debt deleveraging cycle right now.  (Look at the second graph for evidence)  Longer term this is healthy for the country to 'flush out' the excessive credit built up over time.  Unfortunately debt deleveraging means reducing ones current spending to repay all the previous spending (or defaulting on your debts)  Either way it detracts from current growth.

In previous posts and comments I have mentioned the difficulty of determining how much of the decline in consumer credit (a subset of consumer debt. Don't blame me for the lack of clearer descriptions) is due to lower spending versus higher charge offs.  Fortunately the Federal Reserve has done a little work on this very topic:

Notably, year-over-year growth in consumer loans adjusted for charge-offs has remained positive, which contrasts the negative growth in the as-reported series. That is, the net growth in new loans and loan repayments shows a positive (albeit slowing) growth rate once charge-offs are factored in. Over 2009, this estimate of charge-offs totaled about $27 billion while banks' average consumer loan balances declined by about $25 billion. Thus, a significant portion of the recent decline in consumer loan balances is the result of charge-offs.

This may explain consumer spending being more robust than the consumer credit numbers were showing.  The consumers are still buying, they are just unable to pay for it :) 

Just one reason I'm staying out of the equity playground right now.

The equity markets are always inundated with economic news and indicators.  One of those indicators that 'doesn't really matter until it does' is the TED (Treasury / EuroDollar) spread or the difference between short term US Treasury rates (Treasury) and short term dollar denominated debt in Europe (Eurodollar)  It is a good indicatior of distress in the short term money markets and before the crisis of fall 2008 the TED spread was flashing a warning signal. 

As you can see from the chart above the TED spread has started to turn upwards after spending all of 2009 in a steady decline.  You can play with the graph at stockcharts.com if you want to zoom in or change the indicators.  While the TED spread is currently below the elevated levels of early 2008 it has been consistently rising since late April 2010.    This rise also lends credence to the feeling many have (including myself) that this correction is different than all the others we've had since the March 2009 lows.

Until the TED spread takes a rest from its ascent I'll most likely be watching the stock market from the sidelines.

edit: stockcharts.com does not show the TED spread in real time. You can watch it real time here:  http://www.bloomberg.com/apps/quote?ticker=.TED%3AIND

Timberrrrr! -- Lumber prices hitting the ground.

A few months ago I commented on rising lumber prices and how in my opinion they were due to short term supply problems instead of demand.   It appears now that between winter rains ending and the home buyers tax credit expiring, the supply/demand situation has reversed itself.   Lumber futures prices peaked in mid April and are now below when I first posted on Feb 8, 2010.

The full impact of the tax credit's expiration is not yet known but home mortgage purchase application data is not promising.  Calculatedrisk (2010 June 9) states:

Purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, as home buyers have not yet returned to the market following the expiration of the home buyer tax credit at the end of April.

A longer term graph from Calculatedrisk does not show any sort of bottoming in the trend either.

The elevated level of mortgage delinquencies and real estate owned by the GSE's provides a very clear glimpse at 'shadow' inventory that may appear in the comings months.  (Data from May 12 posting) Add it all up and existing housing supply looks to increase and demand continues dropping.  

Disclosure: Short PCL (Plum Creek Timber)

A final update on the Greek 'bailout'

I'm closing the running commentary on the upper right corner of the blog regarding the Greek financial situation.  Below is a copy of the text and links. 

The Greek drama has moved from the front page back a few sections and is on a 'slow burn'  I don't expect the situation to be resolved with the monstrous bailout package and as you can see from the chart Greek 10 year yields have started to slowly creep upwards.   In my opinion this will hit the front pages again and it won't be good news.  When? That's the big question. . . .
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Wondering how long the Greek drama will play out . . . Just because the EU promises some cash doesn't mean it is going to happen. The German constitutional court may have something to say about violating the Lisbon Treaty.
A Telegraph article lays out the details (13 April, 2010)

How much are the Irish and Italians going to contribute?

p. s. 10 year Greek bond spreads expanded on April 13th. I guess 40 billion euros is only good for one day.

April 20: Bond spreads hit new extremes last night again.

April 21: 8.11% -- spreads widened further.

April 22: 8.84

April 23: Greece pulls the rip cord and officially asks for aid. Want to guess how many days until this wears off?

April 26: 9.56% -- Aid request good for one day.

Some video of Marc Faber

Here's two somewhat lengthy videos of Marc Faber.  I suggest you watch both and see what one man thinks about the past and future.  While I think it likely his prediction central banks will keep printing it is not assured. 

The second video is a debate between him and Arthur Kroeber of Gavekal Dragonomics regarding the 'bubble' in China.  One item to note is how many people in the room think China will overheat. 




Reuters link for debate

ht: Wildebeests
ht: Business Insider

China home sales decline

If the results from Vanke (A Chinese property developer) are indicative of the entire nation, home sales are declining rapidly.   The property developers can hold on for a while but eventually their pipeline of developments are going to cause some 'indigestion' and they will be forced to cut prices, reduce the pace of new home construction, or a mixture of both.  This bears watching in the future.

From China Daily:

China Vanke Co, the country's largest property developer by market value, announced on Sunday that its sales revenue in May decreased 20.2 percent from a year earlier amid the government's tightening moves.