Are we headed for a world wide meltdown?

[lustylad]

Originally Posted by Tiny

If the woman had been hatching plans about energy in the faculty lounge of the engineering department at Berkeley, I might give her a little credit. But that's not the case.

She holds a BA (in Poly Sci/French) from UC-Berkeley and a JD from Harvard.

Hmmm... does any of this count as "relevant private sector experience"? Does gassing up tour boats make her an energy expert?

"In 1978, she appeared on The Dating Game, and held jobs as a tour guide at Universal Studios and in customer service at the Los Angeles Times and was the first female tour guide at Marine World Africa USA in Redwood City, piloting boats with 25 tourists aboard."

https://en.wikipedia.org/wiki/Jennifer_Granholm

[WTF]

Originally Posted by Tiny

Hmm, Well what do you do if you're a lawyer, with no experience outside of government. And the President of the United States appoints you as Secretary of his Department of Energy, with a $7.5 billion annual budget. And someone asks you a question and you really don't know the answer, because you don't know jack about fossil fuels and nuclear, which are mostly what we use for energy in America. Well, you can laugh a lot, and not answer the question. Makes sense. It works for Kamala too.



If the woman had been hatching plans about energy in the faculty lounge of the engineering department at Berkeley, I might give her a little credit. But that's not the case.

Are we headed for a ww meltdown professor?

[Tiny]

Originally Posted by WTF

Are we headed for a ww meltdown professor?

https://www.eccie.net/showpost.php?p...&postcount=498

https://www.eccie.net/showpost.php?p...&postcount=502

- Professor Tiny

[Tiny]

Originally Posted by lustylad

Hmmm... does any of this count as "relevant private sector experience"? Does gassing up tour boats make her an energy expert?

"In 1978, she appeared on The Dating Game, and held jobs as a tour guide at Universal Studios and in customer service at the Los Angeles Times and was the first female tour guide at Marine World Africa USA in Redwood City, piloting boats with 25 tourists aboard."

https://en.wikipedia.org/wiki/Jennifer_Granholm

Darn it, you're right again. She may have enough experience to be a good Secretary of the Department of Gassing Up Tour Boats.

[Texas Contrarian]

It's often said that the primary transmission method through which Fed policy works is the housing market, which of course is greatly affected by interest rate expectations.

One thing people sometimes forget amid all the reports of $2.5 trillion "excess" cash poured directly into households through relief and stimulus packages that were way overdone is all the mortgage equity withdrawal (often referred to as "MEW").

Many millions of households either refinanced at much lower interest rates or did the "buy/sell shuffle," sticking cash into their pockets. Mortgage interest rates dropped like a stone soon after the pandemic shocked the financial system, allowing many homeowners to substantially improve their household financial system; thus combining with the federal government largesse to temporarily enrich households at a record rate.

But that was a one-off. A normalizing interest rate environment is in the process of causing a lot of adjustments and repricings in the housing market, just at it will in many other markets.

Check this:

https://www.redfin.com/news/home-pur...-through-2022/

[Texas Contrarian]

One of the most widely discussed reads of last week comes from Gillian Tett of the FT. More and more people are apparently waking up to the concern that there is in fact no "free lunch" and that racking up all this debt produces severe adverse consequences, although not right away. It will act as a growth-impeding albatross around the economy's neck for a very long time.

The WSJ's editorial board and a couple of its contributors have also made the same case. Here's the FT piece. It's probably paywalled, so I'll copy & paste it:

Gillian Tett
6-7 minutes

This week, yet more eye-popping economic data has emerged. Take inflation. On Wednesday, it emerged that US annual inflation hit 9.1 per cent in June, the highest level since 1981.

Unsurprisingly, that has raised expectations of increasingly sharp future rises in interest rates. This, in turn, is prompting bodies such as the IMF to slash growth projections, in the US and elsewhere.

But while investors and economists worry about recession, there is another related question to ponder: how will high inflation and rising rates affect the world’s growing mountain of debt?

During most of the past ten years, this debt question has often been ignored by pundits, because a multi-decade decline in rates and inflation kept borrowers’ servicing costs low, or falling. But Wednesday’s number underscores that the climate has changed. Debt data is just as eye-popping as inflation.

A recent report from JPMorgan, which crunches statistics from The Institute of International Finance, starkly details the issue. It notes that total global debt was 352 per cent of gross domestic product in the first quarter of this year, with private sector debt accounting for two-thirds of this, and public sector debt one-third.

The good news is that this ratio has declined slightly from a peak of 366 per cent in early 2021, due to strong global growth. The bad news, however, is that the current ratio is still 28 percentage points above 2019 levels, before Covid-19 lockdowns sparked frenetic government and private sector borrowing.

Moreover, the pandemic-era increase was broad-based and came after a large jump in debt during the 2008 global financial crisis — and the former was considerably bigger than the latter. Thus, total global debt today, relative to GDP, is more than double its 2006 level — and triple the 2000 ratio (when it was under 100 per cent).

Yes, you read that right: leverage in the global economic system has risen more than three-fold this century; and the only reason that this went (mostly) unnoticed was sinking interest rates.

So what happens now if rates increase? No one knows. If you want to be optimistic, you might argue that there is no need to panic since spiralling debt is a feature of an increasingly sophisticated globally integrated world, not a bug. Just as 21st-century consumers often use credit cards instead of cash for shopping, which makes consumer debt seem bigger than before even if retail spending is unchanged, corporate activity today is powered by evermore complex credit flows.

We are exploring the impact of rising living costs on people around the world and want to hear from readers about what you are doing to combat costs.

Inside headline gross debt numbers there are also credit flows that sometimes cancel each other out, and the rising value of liabilities is sometimes matched by rising asset values. Thus, while Japan has the world’s highest debt-to-GDP ratio, different government agencies owe debt to each other.

And while China’s private sector debt is almost three times GDP, the deep-pocketed government is implicitly backing some loans. Similarly, while the US also has debt three times the size of GDP, this borrowing is partly offset by the rising values of private and publicly held assets.

“The total increase in gross debt might overstate the rise in debt vulnerabilities,” a recent report from the Committee on the Global Financial System notes. It adds that any “analysis of distributions [of vulnerabilities] requires micro data, which are often not available from public sources”. The nature of creditors, value of offsetting assets and maturity of the debt matters.

Nevertheless, even with these caveats, the trend is clearly worrying the CGFS — so much so that its report uses central banks’ internal data to try to model some of the private sector “vulnerabilities”. This produces a smorgasbord of striking micro data. To cite one example: while 50 per cent of the pandemic-era debt assumed by companies in Italy and Spain is coming due in the next couple of years (making them vulnerable to rising rates), in Germany and America the ratio is just 25 per cent.

Or, to cite another: the CGFS calculates that 17 per cent of companies in industrialised economies are “zombies”, or entities that can only be kept alive by virtue of low rates; in 2006 this ratio was 10 per cent. A third nugget: some 90 per cent of German households expect house prices to keep rising, up from 40 per cent in early 2020 — a pattern that may “amplify the current upswing in household credit”, the CGFS says.

These details suggest that rising rates will create plenty of mini debt shocks in the coming years. Indeed, these are already erupting: in the sovereign sector (say, with Sri Lanka); the western corporate world (with Scandinavian Airlines or Revlon); and the emerging markets corporate sphere (in cases such as China’s Evergrande)

But the really fascinating question is the bigger one: can a thrice-leveraged system ever really deleverage, without suffering a full-blown crisis (that is, mass default)? After all, growth is unlikely to provide an exit route. And while inflation is “a potential route for reducing debt relative to GDP”, as the JPMorgan report notes, that only works if inflation “is unanticipated and does not drive up interest rates”. Therein lies the challenge for central bankers — and the huge philosophical question hanging over our 21st-century global economic system. [End of article]

[WTF]

Originally Posted by Tiny

https://www.eccie.net/showpost.php?p...&postcount=498

https://www.eccie.net/showpost.php?p...&postcount=502

- Professor Tiny

Short term?

[Tiny]

Originally Posted by Texas Contrarian

One of the most widely discussed reads of last week comes from Gillian Tett of the FT. More and more people are apparently waking up to the concern that there is in fact no "free lunch" and that racking up all this debt produces severe adverse consequences, although not right away. It will act as a growth-impeding albatross around the economy's neck for a very long time.

The WSJ's editorial board and a couple of its contributors have also made the same case. Here's the FT piece. It's probably paywalled, so I'll copy & paste it:

Gillian Tett
6-7 minutes

This week, yet more eye-popping economic data has emerged. Take inflation. On Wednesday, it emerged that US annual inflation hit 9.1 per cent in June, the highest level since 1981.

Unsurprisingly, that has raised expectations of increasingly sharp future rises in interest rates. This, in turn, is prompting bodies such as the IMF to slash growth projections, in the US and elsewhere.

But while investors and economists worry about recession, there is another related question to ponder: how will high inflation and rising rates affect the world’s growing mountain of debt?

During most of the past ten years, this debt question has often been ignored by pundits, because a multi-decade decline in rates and inflation kept borrowers’ servicing costs low, or falling. But Wednesday’s number underscores that the climate has changed. Debt data is just as eye-popping as inflation.

A recent report from JPMorgan, which crunches statistics from The Institute of International Finance, starkly details the issue. It notes that total global debt was 352 per cent of gross domestic product in the first quarter of this year, with private sector debt accounting for two-thirds of this, and public sector debt one-third.

The good news is that this ratio has declined slightly from a peak of 366 per cent in early 2021, due to strong global growth. The bad news, however, is that the current ratio is still 28 percentage points above 2019 levels, before Covid-19 lockdowns sparked frenetic government and private sector borrowing.

Moreover, the pandemic-era increase was broad-based and came after a large jump in debt during the 2008 global financial crisis — and the former was considerably bigger than the latter. Thus, total global debt today, relative to GDP, is more than double its 2006 level — and triple the 2000 ratio (when it was under 100 per cent).

Yes, you read that right: leverage in the global economic system has risen more than three-fold this century; and the only reason that this went (mostly) unnoticed was sinking interest rates.

So what happens now if rates increase? No one knows. If you want to be optimistic, you might argue that there is no need to panic since spiralling debt is a feature of an increasingly sophisticated globally integrated world, not a bug. Just as 21st-century consumers often use credit cards instead of cash for shopping, which makes consumer debt seem bigger than before even if retail spending is unchanged, corporate activity today is powered by evermore complex credit flows.

We are exploring the impact of rising living costs on people around the world and want to hear from readers about what you are doing to combat costs.

Inside headline gross debt numbers there are also credit flows that sometimes cancel each other out, and the rising value of liabilities is sometimes matched by rising asset values. Thus, while Japan has the world’s highest debt-to-GDP ratio, different government agencies owe debt to each other.

And while China’s private sector debt is almost three times GDP, the deep-pocketed government is implicitly backing some loans. Similarly, while the US also has debt three times the size of GDP, this borrowing is partly offset by the rising values of private and publicly held assets.

“The total increase in gross debt might overstate the rise in debt vulnerabilities,” a recent report from the Committee on the Global Financial System notes. It adds that any “analysis of distributions [of vulnerabilities] requires micro data, which are often not available from public sources”. The nature of creditors, value of offsetting assets and maturity of the debt matters.

Nevertheless, even with these caveats, the trend is clearly worrying the CGFS — so much so that its report uses central banks’ internal data to try to model some of the private sector “vulnerabilities”. This produces a smorgasbord of striking micro data. To cite one example: while 50 per cent of the pandemic-era debt assumed by companies in Italy and Spain is coming due in the next couple of years (making them vulnerable to rising rates), in Germany and America the ratio is just 25 per cent.

Or, to cite another: the CGFS calculates that 17 per cent of companies in industrialised economies are “zombies”, or entities that can only be kept alive by virtue of low rates; in 2006 this ratio was 10 per cent. A third nugget: some 90 per cent of German households expect house prices to keep rising, up from 40 per cent in early 2020 — a pattern that may “amplify the current upswing in household credit”, the CGFS says.

These details suggest that rising rates will create plenty of mini debt shocks in the coming years. Indeed, these are already erupting: in the sovereign sector (say, with Sri Lanka); the western corporate world (with Scandinavian Airlines or Revlon); and the emerging markets corporate sphere (in cases such as China’s Evergrande)

But the really fascinating question is the bigger one: can a thrice-leveraged system ever really deleverage, without suffering a full-blown crisis (that is, mass default)? After all, growth is unlikely to provide an exit route. And while inflation is “a potential route for reducing debt relative to GDP”, as the JPMorgan report notes, that only works if inflation “is unanticipated and does not drive up interest rates”. Therein lies the challenge for central bankers — and the huge philosophical question hanging over our 21st-century global economic system. [End of article]

Well, in the USA, YoY CPI inflation is 9.1% and the fed funds rate is 1.5%. In the Euro area, inflation is 8.6% and the policy rate is 0%. Japanese inflation is 2.5% and the main short term interest rate is -0.1%.

So maybe the worlds' borrowers won't go broke paying interest. But then on the other hand, if the world's central banks stay behind the curve too long it seems like inflation could get way out of control. If not for what you've pointed out here about commodity prices, inventory levels, etc., I might have taken a small punt, shorting bond futures contracts.

A question,

And while inflation is “a potential route for reducing debt relative to GDP”, as the JPMorgan report notes, that only works if inflation “is unanticipated and does not drive up interest rates”.

Do you think that's true, that inflation needs to be unanticipated, if it's going to reduce debt relative to GDP? If the answer is yes, what's the reasoning behind it.

Many thanks Contrarian! Good article.

[Tiny]

Originally Posted by WTF

Short term?

Short term we're all alive.

Conversely, in the words of John Maynard Keynes, "In the long run we are all dead."

[Texas Contrarian]

Originally Posted by Tiny

A question,

And while inflation is “a potential route for reducing debt relative to GDP”, as the JPMorgan report notes, that only works if inflation “is unanticipated and does not drive up interest rates”.

Do you think that's true, that inflation needs to be unanticipated, if it's going to reduce debt relative to GDP? If the answer is yes, what's the reasoning behind it.

My take is that the author is referring to the assumption that absent a widespread expectation of high levels of inflation persisting for much longer, the Fed will avoid raising interest rates as steeply as many observers now project.

If neither short-term nor long-term rates spike sharply, interest costs to the Treasury would presumably not increase enough to worsen deficit spending trends as much as feared, so the debt/GDP trajectory could then have a chance to stabilize. (At least, if some measure of sanity eventually returns to congress and the White House.)

And it sure looks to me like inflation will soon cease being the nation's #1 worry, as all sorts of disinflationary indicators have been popping up all over the landscape. However, like a piglet going through a python, stuff like this takes a while to show up in the headline CPI and PPI numbers.

More news today suggesting that a disinflationary recession is likely on the way:

https://www.cnbc.com/2022/07/20/mort...-22-years.html

[Tiny]

Originally Posted by Texas Contrarian

More news today suggesting that a disinflationary recession is likely on the way:

https://www.cnbc.com/2022/07/20/mort...-22-years.html

I wonder what the effect would be on our investments in stocks. Disinflation is usually correlated with increases in share prices. In general that's a great time to buy. But I'd suspect this would in part be because interest rates are going down. What happens when, say, the Fed Funds rate is only at 3% and inflation is at 8%? Interest rates don't have a long way to fall. I guess regardless, buying during recessions usually turns out well.

About the link, I plugged a 400,000 fixed rate 30 year mortage with a 20% downpayment into mortage calculator. Initial monthly payments go from $1632 at a 3% interest rate, where we were a year ago, to $2169 per month now at 5.84%. That's about a 32% increase. I can see why home sales are being hit!

[Texas Contrarian]

Originally Posted by Tiny

I wonder what the effect would be on our investments in stocks. Disinflation is usually correlated with increases in share prices. In general that's a great time to buy. But I'd suspect this would in part be because interest rates are going down. What happens when, say, the Fed Funds rate is only at 3% and inflation is at 8%? Interest rates don't have a long way to fall. I guess regardless, buying during recessions usually turns out well.

About the link, I plugged a 400,000 fixed rate 30 year mortage with a 20% downpayment into mortage calculator. Initial monthly payments go from $1632 at a 3% interest rate, where we were a year ago, to $2169 per month now at 5.84%. That's about a 32% increase. I can see why home sales are being hit!

I think the long-term outlook for solid, soundly financed, cash-flowing companies will be fine after the short-to-intermediate term process of wringing out excesses and letting the markets reprice and reach new equilibria. Stocks can do very well in a low/moderate inflation and relatively low interest rate environment, even if trend growth is no greater than the roughly 2% trendline of the last couple of decades. (Especially if you buy them during a recession-associated bear market!)

Wolf Richter has a couple of recent reports on the tough outlook for the housing market:

https://wolfstreet.com/2022/07/18/ho...ntiment-dives/

https://wolfstreet.com/2022/07/20/ho...uddenly-jumps/

"Holy-moly" mortgage rates! (LOL)

[Texas Contrarian]

A few disinflation/recession signposts:

As noted by articles linked in the previous post, the sizzling housing market of 2020-2021 has little runway left.

Additionally, the rapid rise of apartment rents, which ripped 20-25% across the US in the 18-month period prior to the early days of 2002, has slowed way down. DFW-area analysts now estimate that owners are not likely to be able to push rents more than 5% over the next 12 months, if even that.

Almost all commodities futures prices have been falling very quickly over the last 3-4 months.

Oil (WTI) down about 21% from its March high. Copper down about 32% since March. Aluminum down 35% during the same period. And the list goes on and on.

Lumber futures cliff-dived a whopping 60% since early March. (Not surprising, given the cratering housing market.)

Even Chicago wheat futures plunged during the past 4 months, despite that being the most likely commodity to panic markets after Putin's invasion of Ukraine, an important breadbasket region. Futures price levels are back to just about where they ranged during most of 2021.

And then there's iron ore, considered by some observers the most important indicator of China's current condition, given their humongous debt-financed real estate development binges. It's down about one-third since the March peak and more than 60% from the 2021 peak.

By the way, has anyone in recent years remotely believed the growth claims published by the CCP's "news" propagandists?

[WTF]

Maybe we should dust off the term transitory!

[Why_Yes_I_Do]

has yet to reconcile.