Showing posts with label credit. Show all posts
Showing posts with label credit. Show all posts

Monday, July 10, 2017

Chasing the next credit bubble. It feels best right before it pops.

A recent tweet by Kevin Smith of Crescat Capital  (someone I've had the pleasure of meeting in person) reminded me of just how far we've come since 2008 and the Great Recession.


By how far we've come I'm not meaning in a positive sense.  If you look at the selected ratios of debt to GDP for Canada, China, and Australia they've each grown tremendously since 2008/09.   While this has helped goose growth in each of their respective economies (and spilled out into the greater world as well)  it does not bode well for the future.  The thing about debt is it need to be paid off.  Somehow, someway (by default, payment or inflation) the ratios will drop when they reach such lofty heights.  

Crescat capital annotated the above chart rather nicely showing you the negative events which coincided with either a rapid rise in debt to GDP (like Thailand) OR a high ratio overall (Japan, USA, Spain)  Their implication is Canada, China, and Australia are heading toward a likely credit crises and I'm inclined to agree with them.  

These are not the only shimmering spheres on the horizon however.  Look below and you can see all three of the Scandinavian countries are above US levels before our little economic problem in 2008.


Source: Federal Reserve (link)

The challenge with calling the tops in a bubble is you are battling central bankers and their willingness to keep the debt flowing.  Who wants to say no when the money is flowing?  Even central bankers can exhibit human tendencies on occasion, they don't want to be derided for being the Grinch that stole Christmas...  As such it's very hard to know when they will finally start to restrict the lending and tighten liquidity.    While the US is not at the top of this rarified list it is entirely possible our current series of recent (and future?) rate hikes will be enough to tip one of these countries over the edge which could then get the dominos falling.  When is unknown, but that it will happen appears quite likely.

Update:  https://blog.pimco.com/en/2017/05/A%20Less%20Impulsive%20China%20Bracing%20for%20Lower%20Growth

Looks like the Chinese credit impulse may have turned negative recently.  As the data presented above is nearly 6 months old this is very interesting.  While it ripple through to the US markets? We shall see shortly.




Tuesday, August 2, 2011

Home prices going up? Not until you show me the money.

Are home prices going up in a sustained manner anytime soon? No


A recent presentation by Australian Professor Steve Keen inspired me to search for a similar American data series. One exists and it does not predict any sort of sustained bounce in American home prices. (I am simplifying Mr. Keen's presentation as he looks primarily at the 2nd derivative of loan levels but the level of destruction in American mortgages outstanding is epic)

As Mr. Keen states, it is not people who buy homes, it's people with money who buy homes.  Just to show you the magnitude of the home devastation we are experiencing here's the entire home loan series:
For the entire data series, going back to the mid 50's we've never seen a year over year decline in the total value of home loans outstanding.  Yes, some of this decline is due to homes being foreclosed and the loans vaporizing as a result, but that also eliminates yet another person who cannot trade up from their current home to something larger as their equity and credit score head towards zero.

Until we see year over year growth in mortgages outstanding we will not see a sustained nationwide rise in home prices. We will of course see localized variation in this with some pockets of growth but nothings happening until You show me the money.



Disclosure: The author is short some housing related stocks.

Friday, October 15, 2010

Consumers and Credit -- Behaviors may not be changing

One item I follow are aggregate debt levels as well as additional focus on the consumer as they are a large portion of GDP.

A WSJ blog entry from Sept 18 caught my eye and the results of their analysis are very interesting.

Their conclusion is the consumer is not voluntarily deleveraging, rather it is from charge-off and defaults.  This information does synch with how retail sales continue slowly rising even in the face of declining credit. 

From the WSJ:

There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.
That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.


Interesting data providing for very different conclusions. People will shop until their credit cards are pried from their cold dead fingers.

Monday, July 26, 2010

Consumer credit keeps rolling downhill.

Earlier this month the Fed released the consumer credit data for May.  Total consumer credit keeps rolling downhill with no sign of slowing down.  I've included a longer term year over year chart as well as a more recent graph showing total consumer credit outstanding.

As you can see from this longer term year over year chart a sustained decline in lending has not occurred since this data series began at the end of World War II.  This is just one example of how this recession is different than all other post WWII slowdowns.

Looking at graph #2 for a shorter time period one again sees the steady decline in consumer credit.  Compare this to the early 90's where consumer credit levelled off but did not decline. 

In my opinion until the employment numbers start to seriously improve and home prices start creeping upwards we are going to see continued declines in consumer credit and thus sluggish growth (at best) in the overall economy.

Source: Federal Reserve

Monday, June 21, 2010

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 :) 

Monday, April 12, 2010

Consumer credit continues dropping

Consumer credit continues falling.  The rate of decline appears to have stabilized but this means consumer credit continues to contract with no anticipated point of stabilitzation.





Longer term a deleveraged consumer is good news.  Getting there is not pleasant, whether it be from consumer paydowns or bank writing off debts.  As I have mentioned before the decline in consumer credit and debt prevents a strong recovery.  Not only is the added impulse of new debt (and thus spending) missing but the additional drag of debt reduction is still present.

After the inventory bounce recedes in the next 2 quarters GDP growth will remain muted in my opinion.

Monday, March 15, 2010

Total consumer debt continues falling & Consumer debt / GDP perspective

Total consumer debt statistics (all debt including home loans) came out recently and the credit decline continues.  I have produced a couple of graphs to provide some perspective on the data. 

Year over year consumer debt is still falling but at least we are no longer speeding up in our rate of decline.  Looking back you can also see we have not had a period of negative growth any time during the entire data series.

Observing total consumer debt to gdp (both in nominal terms) provides some interesting fodder for discussion. During the 1990's consumer debt / GDP rose <10%. Compare that to the 2000's where the growth rate was much faster. 

The consumer debt / gdp ratio has consistenly risen over the long term.  This ratio cannot rise forever!  Is parity where one starts to encounter serious problems? 

The Wall Street Journal ran a page one article regarding declining debt Friday, March 12 describing how defaults are reducing the total debt load of American consumers.

U.S. consumers are shedding debt at the fastest rate in more than six decades, largely through a wave of defaults, in a trend that underscores the depth of their financial troubles but could also help clear the way for a stronger economic recovery.


Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion, the Federal Reserve reported Thursday—the first annual drop since records began in 1945. The debt amounts to $43,874 per U.S. resident.

While some of the decline is from consumer defaults, this is not a 'pain free' method of debt reduction.  Banks become capital deficient and reduce their lending when they take losses in excess of their models.

Longer term it is healthy for the economy to have a lower debt load but the path there is not easy.

Thursday, February 18, 2010

Consumer credit keeps contracting faster

Consumer credit data came out about 2 weeks ago and the numbers are not getting any better.  Unlike my previous entries showing the very long term I thought I'd zoom in a little to show you how this recession is unlike anything we've seen in the last 40 years.  Consumer credit keeps going down and the rate of declining is increasing.  Call this an anti-'green shoot'.

The economy will not properly recover and the Federal Reserve will most likely not raise interest rates too much (if at all) until consumer credit and bank lending start rising.  Until then, get used to very low short term rates.

Monday, December 7, 2009

Consumer credit, where art thou?


Consumer credit (consumer loans excluding home loans) was released today.  Consumer credit continues to contract further and faster.  Unlike my previous posting I have extended the graph back to the beginning of the data series so you can see the extent of the current decline in context.

Since World War II at worst consumer credit levelled off for a period of time before resuming its ascent.  Not this time.  While you may not be able to see it, the current rate of decline is getting worse each month and shows no sign of at least slowing down. 

Monday, November 9, 2009

Consumer credit continues falling


In my previous post I discussed all consumer loans outstanding.  The data is produced quarterly so there is a bit of a lag.  (Another possible post, the desire for high frequency data and how it can sometimes trip you up.)  Consumer credit (all debt but mortgage debt) is reported monthly so we can get a feel of whats coming down the pike.  As the chart shows it continues to fall.

The chart is only of recent history but the US has not experienced this since WW II.   Unfortunately the rate of decline continues to accelerate. 

I would personally feel more confident in this recovery if consumer debt at least stopped cliff diving.  Whether credit is falling due to less demand or bank restrictions doesn't matter at this point.  Until the consumer starts borrowing any recovery will be very tepid and most likely artificial.

Thursday, November 5, 2009

Total consumer debt outstanding falling, not just revolving credit

After some rummaging around I finally found the data series showing total consumer debt outstanding. This series includes both home and non home debt.  I have blogged before (2009 October 7) about the year over year decline in non-home-debt outstanding but thought it would be prudent to chase down the TOTAL consumer debt outstanding to see if it is falling as well.


Yup, it is.  The data shows the same trend as the subset previously mentioned.  Like all the other credit/loan/debt outstanding I have recently presented the year over year numbers are negative, show no signs of stabilizing, and are unprecedented in their decline.

I usually dislike the term 'It's different this time' but this time, it really is!

Wednesday, October 14, 2009

Subprime housing mess 2.6


As I have previously posted, the FHA (Federal Housing Administration)  is making loans that are rapidly going bad. 

Here are some more details and snarky commentary from my favorite bunny cannon shooting blogger, Fund my Mutual Fund:  10/14/09 NYT: FHA Problems Raising Concern of Policy Makers


TraderMark provides some additional detail and of course colorful description of the current political and economic situation regading falling home prices and the government's attempt to prop them up.

The graphic at right shows rising default rates for FHA loans made recently as compared to a couple of years ago.  Please read the article, but here's a few juicy bits.

Let's stop right there. 1 in 5 loans made in 2008 via FHA are ALREADY IN TROUBLE. 1 in 4 loans made in 2007 via FHA are ALREADY IN TROUBLE. We are not even 3 years into these mortgages. This is EXACTLY the same data we were presenting in 2007 about subprime loans! And Alt A's! And Option ARMs!
The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data.


It's some good stuff...

Wednesday, October 7, 2009

Consumer credit continues free fall


Consumer credit outstanding results are not pretty.  Outstanding consumer credit continues falling with neither the first nor second derivative being positive.  As I have mentioned before the rate of decline is unprecidented.   It was World War II the last time consumer credit fell at such a rate and WWII is a pretty good excuse not to go out and borrow more money.  As you can see from the picture (click on it for a larger image) consumer credit before has fallen to a negative growth rate, but only for a short period of time and it quickly turned upwards. 

Since the US consumer is  approximately 70% of US GDP this does not bode well for growth in the near term.

Tuesday, September 29, 2009

Subprime Housing Mess 2.5

Why is this version 2.5? Because we should have learned.  This one is brought to you with the usual actors only this time they are sitting in slightly different chairs.

The Buyer is the same as before, but instead of exceedlingly loose credit standards, the consumer is helped along by an $8,000 first time home buyer tax credit.

The Provider of the loans is not Wall Street this time, but good old Uncle Sam.  From WSJ Opinion (2009 September 29)

The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.

All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more


So who is buying the mortgages? The very banks in trouble, with a little 'encouragement' from the FDIC. (WSJ, September 10,2009)

Holding Ginnie bonds help banks look better because federal bank-capital  guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.
Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn't shrink banks' balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital.
"With the pressure for capital, that's really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank's holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier.
Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said. Mr. Clark credits the strategy with helping First State preserve its capital ratios even as loan defaults swelled to $9.5 million on June 30 from $1.6 million a year earlier. During the same period, its total risk-based capital ratio climbed to 11.3% from 10.7%. That gave First State some breathing room above the 10% ratio regulators require for banks to be deemed "well capitalized."
So my friend, whom I'll call Mr. Green and is a banker:  I have my eyes on some nice short term GNMA mbs paper.  (Fortunately your last name makes Mr. Green easier, otherwise I'd use a different color)  Let us load you up on the GNMA's and forget commercial lending.  Good rates, no 'risk' and you can be out to the links even earlier!  As a nice bonus your risk based capital ratios will improve as well.  I can even provide some additonal low cost margin leverage on my end as well.  The banking regulators and your boss will love you!  </end sarcasm>

Unfortunately this party will end like the last one, but we all will be paying the bill again and it will be much larger.  Too late, the bills are already coming due:  Calculated Risk (September 18,2009) -- FHA Cash Reserves will drop below requirement

Ironically, the Federal Reserves focus on purchasing mortgage backed securities from GNMA, Fannie Mae, and Freddie Mac compresses the spread between mortgages and treasury rates.   An artifcially compressed spread crowds out any private market competition, forcing more loans into the gentle loving arms of Uncle Sam.

If I sound a bit annoyed in this post, you are correct.  Collectively we are not learning from our very recent mistakes.

Wednesday, September 9, 2009

Consumer credit continuing to fall


Data published yesterday shows the continued retrenchment of the U.S. consumer.

I extended the graph's time period so you can see the last time consumer credit outstanding has consistantly been negative is before 1950.

Until the U.S. Consumer starts to borrow again any recovery will be very tepid.