Oct 10. The Weight of Debt
Consumer credit was released on Friday and showed an almost unimaginable rise of $25.9 billion for August (3rd largest since 2001). Without seasonal adjustment it jumped $46.8B, nearly the largest on record. Non-revolving rose $20 billion seasonally adjusted to a whopping $2.712T. (Non-revolving is student and auto loans). The bulk of the increase was non-revolving, and given the deceleration in autos (and stretched lending terms) we point to student loans, which they must now be taking out for grammar school. Remember, most student loans are funded by the government ($1.024T on the books according to the current release, out of nearly $1.4T). I guess the ‘investment’ in education must really be paying off in terms of a highly educated workforce that sparks rapid increases in growth. (“Want fries with that?”). Except for the fact that estimates of growth are continuously ratcheted down each quarter, with both NY and Atlanta Feds projecting 2.2% in Q3 and NY at just 1.3 in Q4.
Reuters ran a story about China on Oct 4: ‘Road to Stagnation? China Inc gets a break from lenders’
Profits at roughly a quarter of Chinese companies in a Reuters analysis were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.
Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of China’s GDP, but few firms reported feeling the heat. Instead, lenders are heeding Beijing’s call to support the real economy and so are rolling over company debt or granting repayment waivers, sometimes for years…
This week it was reported that China’s reserves are edging down and that the off-shore yuan made a new low. China: over-indebted and decelerating and contributing to unfair trade, not so much through currency manipulation, but by allowing dead wood exporters to continue non-economic sales.
The IMF released a report that total global debt to GDP is 225%, to an all-time high of $152T. From the report, “New empirical evidence confirms that financial crises tend to be associated with excessive private debt levels in both advanced and emerging market economies, but high public debt is not without risks.” By “empirical” they mean something that any idiot with a couple of maxed out credit cards already knows. When there is too much debt, too many resources are used to service the debt. When bankruptcies are staved off by lower rates and forbearance, zombies are allowed to roam. Then zombies compete with new companies that have trouble getting sunlight. Resulting in secular stagnation.
There’s nothing written above that is particularly earth-shattering or hasn’t been previously reported. Just some updated names and figures. In the US after the crisis there was a period of deleveraging. All the pundits on tv were happy it was occurring. The problems are twofold, 1) most of the deleveraging came from mortgage foreclosures which essentially shifted to the government’s balance sheet, and 2) deleveraging is painful. It needs to happen on a global basis, but sovereign balance sheets are already bloated. Which leaves option number two: All aboard the PAIN TRAIN, as Izzy Mandelbaum would say.
Back to student loans. Prior to the crisis, they used to say that anyone that could fog a mirror was eligible for a subprime mortgage. Now it seems to be that way with student loans. To be honest, I don’t care if student loans are being used to start up microbreweries and fledgling tech companies in garages. These loans can’t be discharged in bankruptcy. Maybe that’s the smoothest way to create new business and jobs with gov’t financing. I.e. the no-doc small business loan at low interest rates that can’t be discharged, and we’ll call it the Student Loan initiative (which no one can argue with). Set the rate at 500 bps over libor, fixed for five years, no questions asked. Have a limit of $250k over 4 years, as if it’s for education. I’ll bet the success rate for a lot of kids would be pretty good and it would create a more entrepreneurial class in the US than ever before. And yeah, it would probably put some old established businesses out of commission….but that’s how it’s supposed to work. Maybe that’s actually how it’s working now. And I for one, HOPE it is. “Is the money for school?” Don’t ask don’t tell. Might even help income disparity. Both Andreesen and Cuban have said that the amount of capital required these days to start a business is getting smaller. Rather than CBs providing cheap capital to big banks that deny loans to small business but help fund stock repos and dividends for large companies….maybe funnel it right through to ‘student loans’. All I’m saying is maybe that money is better spent on small business experiments than university courses. For example these: ‘Philosophy and Star Trek (Georgetown) or Tattoos in American Popular Culture (Pitzer) or Film Genre: The Zombie Film (U-Cal, Berkeley). Or Surviving the Zombie Apocalypse-Disaster, Catastrophes and Human Behavior (Michigan State)
Apologies for the tangent. Back to this week’s markets. First, oil was up another $1.56 on the week, to over 50.38. As I have mentioned repeatedly, the yoy comps are going to filter into inflation soon. It’s going to give the Fed cover for normalization. The market is pricing December. For political purposes they keep jawboning about November being live. Then after Friday’s data, Hilsenrath declared it’s not. In many ways I thought it was better when there was less Fed transparency and more uncertainty, when there were actually guys called “Fed watchers” that were taken seriously. In any case, on Friday FFX6 (Nov Fed Funds) went from 9957 offer to 58.5 bid. Nov/Jan Fed Fund spread went from 13 to a cycle high of 14.5/15.0. In other words, December is the FOMC hike. But of course there are two more employment reports and a little election beforehand. And by December the Russians and US will come dangerously close to starting a conflagration. Those things will keep the Fed from tightening aggressively. And of course that’s what the market is telegraphing, because no one-year ED spread is above 20 bps and most are stuck around 15.5, though they all edged up this week. So that leaves us to concentrate on the longer end of the market. Last week there had been accumulation of TYX 131 and 131.25 puts. This week there was a large buyer of TYX 130p for 9-12 which were partially exited in the low 20’s. The ten year yield rose 12.5 bps this week and we have supply coming. The German bund broke the water’s surface to close at +2 bps and Japanese tens went to -6.4. The US 30y bond yield rose 13.3. In previous episodes of potential tightening the curve flattened. It’s now steepening ever so slightly. It’s a change worth watching. And short positons continue to be rolled lower, for example, TYZ 127/129ps 22 for 10k.
Fed minutes Wednesday, Retail Sales on Friday and Yellen speaks on Friday, keynote address in Boston, “The Elusive Recovery”. Sounds uplifting.
Quick word about Hurricane Matthew. Katrina was in August of 2005. Landfall August 28/29. First red rallied 50 bps and then fell back immediately. By the end of September the first red had gone through the low existing just prior to the storm. (Which, by the way was 95.50ish at the time). The TY contract rallied about two points, and the reaction lower was faster. This was in the midst of the 2004 to 2006 hiking campaign.
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| 9/30/2016 | 10/7/2016 | chg | |
| UST 2Y | 76.0 | 84.2 | 8.2 |
| UST 5Y | 115.0 | 126.7 | 11.7 |
| UST 10Y | 160.5 | 173.0 | 12.5 |
| UST 30Y | 233.2 | 246.5 | 13.3 |
| GERM 2Y | -68.3 | -66.6 | 1.7 |
| GERM 10Y | -11.9 | 2.0 | 13.9 |
| EURO$ Z6/Z7 | 14.5 | 20.0 | 5.5 |
| EURO$ Z7/Z8 | 13.0 | 15.0 | 2.0 |
| EUR | 112.40 | 112.03 | -0.37 |
| CRUDE (1st cont) | 48.82 | 50.38 | 1.56 |
| SPX | 2168.27 | 2153.74 | -14.53 |
| VIX | 13.29 | 13.48 | 0.19 |
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http://www.reuters.com/article/us-china-corporate-debt-idUSKCN1240NT
