Category Archives: debt bubble

29/10/18: Corporate Credit and the Debt Powder Keg


As it says on the tin: despite growth in earnings, the numbers of U.S. companies that are struggling with interest payments on the gargantuan mountain of corporate debt they carry remains high. The chart does not show those companies with EBIT/interest cover ratio below 1 that are at risk (e.g. with the ratio closer to 0.9) for the short term impact of rising interest rates. That said, the overall percent of firms classified as risky is at the third highest since the peak of the GFC. And that is some doing, given a decade of extremely low cost of debt financing.

Talking of a powder keg getting primed and fused…


29/10/18: Corporate Credit and the Debt Powder Keg


As it says on the tin: despite growth in earnings, the numbers of U.S. companies that are struggling with interest payments on the gargantuan mountain of corporate debt they carry remains high. The chart does not show those companies with EBIT/interest cover ratio below 1 that are at risk (e.g. with the ratio closer to 0.9) for the short term impact of rising interest rates. That said, the overall percent of firms classified as risky is at the third highest since the peak of the GFC. And that is some doing, given a decade of extremely low cost of debt financing.

Talking of a powder keg getting primed and fused…


9/9/18: Populism, Middle Class and Asset Bubbles


The range of total returns (unadjusted for differential FX rates) for some key assets categories since 2009 via Goldman Sachs Research:


The above highlights the pivot toward financial assets inflation under the tidal wave of Quantitative Easing programmes by the major Central Banks. The financial sector repression is taking the bite out of the consumer / household finances through widening profit margins, reflective of the economy's move toward higher financial intensity of output. Put differently, the CPI gap to corporate costs inflation is widening, and with it, the asset price inflation is drifting toward financial assets:


This is the 'beggar-thy-household' economy, folks. Not surprisingly, while the proportion of total population classifiable as middle-class might be stabilising (after a massive decline from the 1970s and 1980s levels):

 Incomes of the middle class are stagnant (and for lower earners, falling):

And post-QE squeeze (higher interest rates and higher cost of credit intermediation) is coming for the already stretched households. Any wonder that political populism/opportunism is also on the rise?

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble


Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

  • Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
  • The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
  • Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
  • As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.


As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".


Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

21/1/18: FT Warns on Credit Cards Delinquencies: High or Hype?


The FT are reporting a 20% rise in credit cards delinquencies across major U.S. banks in 2016, compared to 2017 (see here: https://www.ft.com/content/bafdd504-fd2c-11e7-a492-2c9be7f3120a). Which sounds bad. Although, of course, neither new nor completely up-to-date. That is because the NY Fed give us the same figures (for all U.S. households) through 3Q 2017.

So here is the analysis of the Fed figures:
Despite these worrying dynamics, the levels of delinquencies are still low. In 2007-2008, credit card delinquencies rates were around 9.34% and 10.84%, respectively. In 2006, these were 8.54%. In fact, current running average for 1Q-03Q 2017 is 6.14% or lower than for any year between 2003 and 2012. 

As the chart below shows, the real crisis is currently unfolding not in the credit cards debt, but in Student Loans with 10.05% average delinquency rate for 2017 so far. Credit crds delinquencies are only fourth in terms of severity. 


In terms of total volumes of debt in delinquency, 3Q 2017 data shows credit cards with USD12.3 billion, against mortgages at USD88.56 billion, student loans at USD 30.16 billion and auto loans at USD 17.05 billion. 

Even in terms of transition from shorter-term delinquency (30 days-89 days) to longer-term delinquency (90days and over), credit cards are not as prominent of a problem as student loans:

In summary, thus, the real crisis in the U.S. household debt is not (yet) in credit cards or revolving loans, and not even (yet) in mortgages. It is in student debt, followed by auto loans.