Financial Armageddon

Only 211 Million to Go

Via The Weekly Standard:

Only 211 million people to go?

'The Addiction to Credit Just Goes On and On and On...'

Debt bomb, debt bomb, you’re a debt bomb uh hu
The addiction to credit just goes on and on and on – give it to me
Debt bomb, debt bomb, you’re a debt bomb
A bail-out ooh you’re turn me on

Another humorous perspective -- PG-rated, except for the obscene underlying reality -- on a world gone mad (via YouTube).

(Hat tip to eWallstreeter.)

Wrong Reasons

It was only 10 days ago when the so-called experts were heralding a big jump in consumer borrowing as a positive sign for the economy.

"May Consumer Credit Expands Most in Five Months" (Reuters)

Consumer credit expanded in May by the most in five months as Americans used their credit cards more readily, offering hope household spending will help the sputtering economy.

The Fed also said credit rose more during April than originally thought.

The data follows a report on Friday that showed employers hired at a dismal pace in June, a sign Europe's debt crisis was shifting the economy into low gear. Most economists think economic growth slowed in the second quarter, when the pace of hiring fell off dramatically.

The credit data from May suggests consumers are gaining some confidence after a long stretch in the doldrums.

"If sustained, this dynamic would be positive news for consumer spending as a whole and, ultimately, for job creation," said Dana Saporta, an economist at Credit Suisse in New York.

However, like most of what passes for analysis these days, that upbeat assessment had little to do with economic reality.

As Real Clear Markets notes in "Americans Resort to Plastic Safety Nets,"

Americans are starting to borrow once again, they're doing so at an unexpectedly high level, but it's for all the wrong reasons.

One of those reasons, according to Victor Nava and Anthony Randazzo, has to do with the nature of the obligations that are being taken on.

This added debt is coming from increased levels of borrowing on revolving lines of credit. Households are struggling to pay their bills, leading credit card usage specifically to jump 11 percent in May. Essentially, households are taking on more debts with high servicing costs - not low rate home and business loans.

The latter, for the most part, are paid down over time, leading to reduced debt loads and stronger household balance sheets, while the higher rates and open-ended repayment structure of credit cards and other revolving debt tends to have the opposite effect, leaving consumers worse off. Hence, the authors conclude,

while the Federal Reserve's recent consumer credit report may appear to paint a rosy picture of Americans who are spending money, taking out bank loans at a growing rate, and generally feeling better about the economy, closer inspection suggests a stagnant economy that is failing to create jobs, and Americans resorting to their "plastic safety nets" just to get by.

But even if one takes issue with this assessment, it's not hard to find other evidence that suggests the debts being racked up now are increasingly a matter of necessity rather than choice.

A new report from the Pew Charitable Trust, for instance, detailed by the Huffington Post in "Poorest Americans Turning To Payday Loans To Afford Food, Electricity," reveals that

the poorest Americans are stringing together multiple high-interest loans each year just to keep the lights on and food on the table.

According to the report, 7 out of 10 borrowers use payday loans -- typically short-term, high-interest cash advances [e.g., parrot loans] -- to make payments on recurring bills, including utilities, car payments, food, rent and mortgage payments. This is contrary to the typical marketing from payday lenders, who often pitch the loans as quick cash for a onetime cash crunch.

The report's release comes as other financial woes, like high unemployment and rising household costs, continue to put economic pressure on many consumers. There are signs that other kinds of high-cost borrowing, like use of credit cards, are also being increasingly tapped to pay for everyday items as well.

In contrast, those at the other end of the economic spectrum, who presumably could afford to amp up their spending and borrowing if they were so inclined, are apparently moving in the opposite direction, as Reuters reveals in "AmEx Revenue Misses as Spending Growth Moderates":

Credit card company American Express Co's second-quarter revenue marginally missed Wall Street estimates as cardmember spending growth moderated amid low consumer confidence.

U.S. retail sales fell in June for the third straight month, the longest run of consecutive drops since 2008, and consumer sentiment is now at its lowest level in seven months as Americans take a dim view of their finances and job prospects.

"Overall cardmember spending rose 7 percent, or 9 percent adjusted for foreign currency translations. That's slower than the increases we've seen in the recent quarters," Chief Executive Officer Kenneth Chenault said in a statement.

Cardmember spending at the company, which focuses on the affluent customer, grew in the double-digit range for the last nine quarters.

American Express said spending growth rates slowed across all business lines and all segments.

The company's card data is widely held as an indicator of the spending sentiment of the more affluent consumer, signaling that the weak recovery is taking its toll across all economic segments.

In sum, while more borrowing might have been seen as a positive sign in the good bad old days, that doesn't appear to be the case now.

'We Have Barely Moved the Needle'

One development that convinced me by late-2005 that a major financial crisis was on the way (contrary to popular wisdom), and which inspired me to put together a book proposal on that very subject (at the risk of looking like a fool, I might add), was the fact that the total amount of public and private sector debt outstanding relative to the size of our economy had reached levels that were last seen at the onset of the Great Depression.

So, what has changed in this regard since Financial Armageddon was first published in March 2007?

Not a lot, really.

In fact, as Forbes contributor Rob Clarfeld notes in "What Deleveraging? Financial Relativism and the U.S. Economy," citing data (and a chart) from Bianco Research, our aggregate credit market debt has actually grown since the ostensible end of The Great Recession. According to Clarfeld,

total credit market debt has increased to nearly $54 trillion.  While the private sector debt burden, currently, has declined from $33 trillion in 2008 to $30 trillion, during this interval, public sector debt levels have risen to a record $24 trillion. Relative to GDP and the ability to service this debt, we have deleveraged from a high of 385% total debt to GDP in late 2008 down to 353% today – not very much considering the depth of the last recession.

Even if only modest, this sounds like we’ve at least made some progress, right? Once again, this is only true in a relative sense. We have lowered our debt relative to GDP from their worst levels ever, to the levels that existed way back in…2007 — yes, 2007 — when the financial markets figured out that we had borrowed way more than could be paid back, to be followed by a major credit crisis and the worst recession in 80 years. We have barely moved the needle.

Almost time for financial Armageddon 2.0 (the event, not another book)?

America: Another Year Older

...and more indebted than ever.

The NIghtmare Waiting In the Wings

I know it's not the sort of thing that people talk about when they are focused on what band-aid-cum-can-kicking "solution" authorities are going to come up with in the next 24 hours, but even if by some miracle they sort out the current round of problems, just look at what's waiting for us in the wings:

"Treasurers Face $46 Trillion Financing Cliff" (CFO.com)

A massive amount of global corporate debt matures in the next four years, and it’s causing treasurers to refocus their efforts on securing access to credit.

A measure of the scale of the refinancing problem is revealed in a recent report by Standard & Poor’s Ratings Services. S&P suggests there is as much as a $46 trillion “credit overhang” — the amount of money corporates will need to raise between 2012 and 2016 to refinance their soon-to-mature debts and to fund capital expenditure and working capital growth.

The combination of bank balance-sheet restructuring, a euro zone crisis, a softening U.S. recovery, and the prospect of slower growth in China could make for what S&P calls “a perfect storm” in credit markets. S&P’s working assumption is that “global banks and debt capital markets will largely be able to continue to provide the majority of liquidity to allow most corporate issuers to proactively manage their forthcoming refinancings.” However, S&P warns, “the balance is fragile” and there is the threat of financing disruptions “even for borrowers that are not highly leveraged.”

New money requirements from 2012 to 2016 could be as much as $2.3 trillion in the euro area and the United Kingdom, $3 trillion in the United States, almost $10 trillion in China, and $1 trillion in Japan. (Those numbers assume corporate debt grows at 1.2 times the rate of GDP over the next five years.)

Added to this are estimated refinancing needs of $8.6 trillion in the euro area and the United Kingdom, $8.6 trillion in the United States, $7 trillion in China, and $5.8 trillion in Japan.

But then again, it's only money, right? If we need more, we can just print it.

Not Much Better than at the Peak of the Bubble

In "Knee-Jerk Relativism," I highlighted a Philly Post article detailing how incomplete, inconsistent, or irrelevant statistical comparisons serve to paint a distorted picture of where things stand in today's economy.

As it happens, an article in today's New York Times, "Debt Burden Lifting, Consumers Open Wallets a Crack," makes what I believe is a similarly misleading claim about Americans' financial health:

The bursting of the real estate bubble and the ensuing credit crisis forced American consumers to do something that they had little experience in trying: reduce their debt.It has been a painful process both for borrowers, who have faced foreclosures and bankruptcies, and for lenders, whose have had to take losses vastly in excess of what they thought possible.

But the process is working far faster in the United States than in countries like Britain and Spain, which also faced plunging real estate prices. And now it appears to be contributing to an economic recovery that has gained a little momentum, despite facing headwinds from the European debt crisis. This week’s report that retail sales grew faster than expected in March was the latest sign that consumers — or at least a substantial number of them — are growing more optimistic.

One measure of the financial health of householders is the level of financial obligations, like required mortgage and credit card payments [as well as pay day loans], to disposable income. By the fall of 2007, those obligations took up 14 percent of disposable income, more than at any time since the Federal Reserve began calculating the statistic in 1980.

But now the situation has turned around. The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.

While it's all well and good to say that monthly outlays are less than they were, this development likely reflects the fact that, thanks to the Fed's machinations, interest rates are at historic lows, while maturities for certain kinds of financing, including cash loans, have generally increased as lenders try to keep payments at manageable levels.

The reality is, if you compare the financial obligations ratio cited in the Times article to the ratio of average household debt to median household income, as I've done below, it's apparent that the financial position of U.S. consumers is not much better than it was at the credit bubble's peak.

In the end, it's not just the amount that people shell out each month that matters; the amount they owe also has a strong, if not stronger, impact on their willingness to spend. Under the circumstances, I wouldn't hold out much hope that a consumer recovery is on the way.

Cliff Dive

From Michael Krieger:

Chart of the Federal Surplus/Deficit.  A picture is worth a thousand words.  USA! USA!  Have a great weekend.  Baaaah.

(Image: Federal Reserve Bank of St. Louis)

All Over Again

(Image: source)

Call me cynic, but it's hard to see this as a good thing:

"Junk ETFs Draw Most Cash on Record as High-Yield Hunt Speeds Up" (Bloomberg)

Exchange-traded funds for speculative-grade bonds are drawing the biggest inflows on record from investors seeking easier access to higher-yielding assets.
 
ETFs that track junk-bond indexes have tapped $5.5 billion of investments in the securities this year, according to data from Lipper. That almost quadruples the $1.4 billion recorded during the same period of 2011, which was then the highest since the fund research firm started tracking junk ETF data in 2007.
 
While exchange-traded funds comprise 2 percent of the $1 trillion in U.S. corporate speculative-grade debt outstanding, they accounted for more than a third of the total $14.8 billion of inflows this year into mutual funds and ETFs that buy junk bonds. With the Federal Reserve pledging to hold its benchmark interest rate near zero until at least late 2014, investors are seeking better returns, said Peter Tchir, founder of New York- based hedge fund TF Market Advisors.
 
"ETFs are giving people a fair degree of comfort, providing them with daily transparency and the ability to see a trade in and out, and asking for relatively low fees," Tchir said. The funds allow individual investors to speculate on debt ranked below investment grade without owning the bonds, which is stoking more flows into ETFs.

In fact, it's looking more and more like 2007 all over again.

Got those crash helmets ready?

On Track...to a Train Wreck

(Image: source)

For the bulls, yesterday's news of a much higher-than-anticipated jump in consumer borrowing is yet more proof that the recovery is on track:

"U.S. Consumer Credit Climbed by $19.3B in Dec." (Bloomberg)

Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans.

Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington. The gain topped the $7 billion median forecast of economists surveyed by Bloomberg News and followed a $20.4 billion advance the prior month.

Consumers “are willing to take on this debt because there is some increasing degree of confidence in the economy,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected credit would climb by $15 billion, the highest in the Bloomberg survey. “Consumers over the past several years have done a pretty good job of repairing their balance sheets.”

An improving job market may be giving households the courage to take on more debt in order to sustain spending, which accounts for about 70 percent of the economy. At the same time, increasing dependence on credit may be an indication the gains in employment have yet to push wages high enough to single- handedly give consumers the means to keep shopping.

Unfortunately, as the Rochester Democrat and Chronicle writes in "Report: Student Debt Could Be Next Economic Bomb," this particular track looks to be leading us to another train wreck.

Student debt is looming as a national problem that could have repercussions reminiscent of the mortgage crisis, says a new report by the National Association of Consumer Bankruptcy Attorneys.

The study, released Tuesday and based on a nationwide survey of 860 bankruptcy lawyers, said that bankruptcy attorneys nationwide are seeing at the ground level "what feels too much like what they saw before the foreclosure crisis crashed onto the national scene."

The report calls for a change in bankruptcy laws.

In the survey, 81 percent of respondents said that potential clients with student loan debt have increased "significantly" or "somewhat" in the last four years.

And 95 percent of respondents reported that few student loan debtors have any chance of discharging what they owe through a bankruptcy proceeding because they have to prove "undue hardship" — a standard that is difficult to meet.

The total debt from student loans is about $1 trillion, about 14 times more than 15 years ago and well above the estimated total credit card debt of $798 billion.

...

The report urges a change in bankruptcy laws so that those burdened with student debt would be on the same footing as others in debt facing bankruptcy.

"It's not fair and needs to be corrected," said U.S. Rep. Steve Cohen, D-Tenn., sponsor of legislation that would make changes sought in the report.

...

William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, offered a warning.

"Take it from those of us on the frontline of economic distress in America," he said. "This could very well be the next debt bomb for the U.S. economy."

Of course, Wall Street knows better -- right? Otherwise, why would they keep buying stocks?

A Tad Unsettled

Suddenly, global credit markets are looking, shall we say, a tad unsettled...

I wonder if we're (finally) beginning to see bond markets pricing in the post-financial-crisis orgy of fiscal recklessness (not to mention the tsunami of refinancing-related supply)?

If so, that's not going to be very good for the public finances of countries that decided high debt levels don't really matter, is it?

Oops.

No Solution

In "On Borrowed Time," Barron's columnist Randall Forsyth further undermines the notion that persistent public profligacy can solve our problems:

Heavy debt loads slow the U.S. economy now and pose threat to the future.

Can a stimulant become a depressant? As with alcohol, government borrowing and spending initially can give a boost, but later becomes a drag. America has hit the downside of that progression.

So says Lacy H. Hunt, chief economist of Hoisington Investment Management (whose eponymous head, Van R. Hoisington, recently was interviewed in the print edition of Barron's.) The deficits that had aimed to stave off a rerun of the Great Depression after the 2008 financial crisis now are having a depressing effect on the U.S. economy, Hunt contends.

Many mainstream "analysts" would argue otherwise. In their view, even though the economy has yet to recover in any meaningful sense of the word, it's only a matter of time before the torrent of debt-financed pump-priming yields the intended results. Moreover, some would undoubtedly claim that the twitches of activity we've seen in the auto sector, for example, and in other areas of the economy are a sign that Keynesianism is working. Unfortunately, those views don't quite square with reality. In fact, writes Forsyth,

the opposite is happening. The multiplier from government spending is no better than zero, Hunt says on the basis of econometric evidence. If the economy is "shocked" with a deficit, gross domestic product will get a lift for three-to-five quarters. After 12 quarters, however, the original stimulus is spent, literally and figuratively. But the debt that was incurred to finance the spending remains, and has to be repaid, with interest. That requires a shift of assets from the private sector to the public sector.

Japan provides an example of this process. That nation's government debt has expanded during its "lost decades" to 200% of GDP from 50%. Meanwhile, nominal GDP in yen terms is basically unchanged. In other words, Japan's debt has quadrupled but has nothing to show for it -- except higher interest costs, which has to come out of the private sector.

Hunt cites the now-familiar conclusion that debt-to-GDP ratios over 90% retard growth from economists Kenneth Rogoff and Carmen Reinhart, authors of the popular This Time is Different: Eight Centuries of Financial Folly, who also presented that conclusion in a 2010 National Bureau of Economic Research working paper, Growth in the Time of Debt.

Hunt also points to an even more exhaustive study on the effects of debt from Stephen G. Cecchetti, M. S Mohanty and Fabrizio Zampolli from the Bank for International Settlements, presented at the Federal Reserve's Jackson Hole confab last year, The Real Effects of Debt , which takes into account the retarding effect of not only government but also corporate and household debt. Those imply "that the debt problems facing advanced economies are even worse than we thought," especially when unfunded future liabilities in the form of promises given by governments in retirement and medical benefits are counted.

Of course, if ivory-tower instilled dogma suggests something different, it's OK to ignore reality -- right?

Big and Bigger

It's that time again...

"Obama to Ask for Debt Limit Hike: Treasury Official" (Reuters)

The White House plans to ask Congress by the end of the week for an increase in the government's debt ceiling to allow the United States to pay its bills on time, according to a senior Treasury Department official on Tuesday.

The approval is expected to go through without a challenge, given that Congress is in recess until later in January and the request is in line with an agreement to keep the U.S. government funded into 2013.

The debt is projected to fall within $100 billion of the current cap by December 30, when the United States has $82 billion in interest on its debt and payments such as Social Security coming due. President Barack Obama is expected to ask for authority to increase the borrowing limit by $1.2 trillion, part of the spending authority that was negotiated between Congress and the White House this summer.

Big numbers, eh? Then again, based on data derived from the latest Citizen's Guide to the 2011 Financial Report of the U.S. Government (hat tip to The Aleph Blog for the link and columnar summary), maybe not...

Almost $61 trillion in debt and unfunded liabilities -- now that's a big number!

Only a Few Short Years

As usual, Zero Hedge (one of my absolute favorite blogs) is at the forefront when it comes to funny money-era milestones:

"US Debt/GDP Hits Post WW2 High 99.5% Following $55 Billion Overnight Debt Increase: Total Debt Now Over $15.1 Trillion"

It seems like it was only yesterday that we celebrated 15,OOO,OOO,OOO,OOOBAMA day. Two weeks later, we are now well over 100 billion in debt over this historic landmark, or $15.11 trillion to be precise, following the predicted $55 billion increase in debt with the settlement of all auctions from last week. And aside from the mind-staggering rate of new debt increase why else is this number notable? Because as we learned 10 days ago, total Q3 GDP in current dollars is $15.18 trillion. In other words, US debt/GDP is now 99.5%, the highest it has been in the post WW2 period, and rapidly rising. What is worse is that the delta to 100% debt/GDP is only $70 billion: this is about half of the next two weekly gross issuances of 3,10,30s and 2,5,7s of about $160 billion over the next two weeks. In other words by the end of 2011, debt/GDP will finally be a triple digit number percentage. And the other notable thing is that the debt limit still is $15.194 trillion. It is ironic that the economic growth ceiling and the debt issuance ceiling are now one and the same: if the the debt target number does not rise neither will the US economy. Q.E.D.

One thing ZH doesn't make too much note of -- this time, at least -- is the fact that it's only taken a few short years of reckless profligacy to get us to the point.

Can't wait to see what this chart will look like when Financial Armageddon 2.0 is fully underway.

Uncontained, Again.

It may have originated in the eurozone, but the current crisis looks to be following along the lines of the one that began in the U.S. subprime mortgage market four years ago. That is, a problem that authorities assured us was "contained" (the Bernank's famous last word) and resolvable has morphed into one that is uncontained and more dangerous by the day.

As the chart shows, an average of credit default swap (CDS) spreads for 71 countries around the world has now surpassed the peak seen in September and is hitting its highest level since April 2009. (Simply put, CDS are bets on the creditworthiness, or lack thereof, of a particular borrower.).

While skewed higher by fiscal basket cases such as Greece, in particular, Portugal, Venezuela, and Pakistan, the overall trend is clearly to the upside -- which is not, despite repeated assurances from those "in charge," a good thing (unless, of course, you're a clueless equity trader who still doesn't quite understand why credit markets matter).

Time to get those helmets on?