Category Archives: Economy

Austerity Isn’t Dead, It Will Come Back With A Vengeance

There’s been a steady stream of recent articles claiming that austerity is dead. The “magic” of false measurements, animal spirits and money printing are used to convince the gullible that there is an easy way out.

This one from James McCormack at Fitch argues that populist politicians are responsible for killing off pragmatic economic policy.

Whilst I don’t deny the medium term tide is against austerity, the very high levels of sovereign debt mean austerity will return.

To understand why this must happen we need to deal with the three key fallacies that austerity opponents are propagating.

First, austerity is wrongly blamed for reducing economic growth. This is such a deceitful lie as it seems so logical and seems to be backed up by examples like Greece. However, the deception here is the false starting point used to measure the “reduction” in growth once austerity is implemented. Countries facing austerity have used debt financed government spending to inflate their GDP, in the same way Lance Armstrong used performing enhancing drugs to inflate his cycling abilities. No one questions that Armstrong was better as a result of using drugs. Yet it is hard for many to acknowledge that GDP is similarly inflated when governments spend excessively. Greece and many others cheated their way to inflated GDP levels and measuring against that is clearly spurious.

Second, there is the avoidance of the reality that increasing debt drags down future economic growth. Anyone that has personal debt understands that those repayments reduce their ability to spend until the debt is cleared. Yet when it comes to government debt, many cite “animal spirits” as the magic that will allow governments to grow into their debts. Even with low interest rates, which also ultimately undermine economic growth, the debt is still there and spending must eventually be reduced to cover the higher repayments. It is true that government investment in a small number of areas can promote long term growth but this isn’t where the vast majority of government spending is going.

Third, many are propagating the view that printing money isn’t the bogeyman it has been made out to be. Nothing bad has happened to Japan, Europe and the US so why worry? This argument conveniently ignores centuries of human history of money printing, including recent examples in Argentina, Venezuela and Zimbabwe. There’s no magic at play, it’s just a matter of time before investors flee dodgy currencies. They will flood to the safety of hard assets and to countries with responsible monetary and fiscal policies.

Austerity isn’t in favor and it could be a while yet before the consequences play out.

The “magic” of false measurements, animal spirits and money printing are used to convince the gullible that there is an easy way out. Governments with loose fiscal and monetary policies can get away with it for a while, but in the long term they will exhaust their credibility with investors and lose control over their spending levels. At the exact time when standard economics would advocate governments running a deficit, these governments will be cut off from borrowing more. Austerity isn’t dead, it is just taking a break before it comes back with a vengeance.

Source: ZeroHedge

What Is Going On In The Vintage Auto Market?

https://s3.amazonaws.com/apps.hagerty.com/sitecore-assets/USHome/homepage/largerHeroImages/US_1440_challenger-new.jpg

The fate of asset bubbles under the new regime.

Everyone is hoping that next Friday and Saturday, at Sotheby’s auction in Monterey, California, the global asset class of collector cars will finally pull out of their ugly funk that nearly matches that during the Financial Crisis. “Hope” is the right word. Because reality has already curdled. Sotheby’s brims with hope and flair:

Every August, the collector car world gathers to the Monterey Peninsula to see the magnificent roster of best-of-category and stunning rare automobiles that RM Sotheby’s has to offer. For over 30 years, it has been the pinnacle of collector car auctions and is known for setting new auction benchmarks with outstanding sales results.

This asset class of beautiful machines – ranging in price from a 1962 Ferrari 250 GTO Berlinetta that sold for $38.1 million in 2014 to classic American muscle cars that can be bought for a few thousand dollars – is in trouble.

The index for collector car prices in the August report by Hagerty, which specializes in insuring vintage automobiles, fell 1.0 point to 157.42. The index is now down 8% year-over-year, and down 15%, or 28.4 points, from its all-time high in August 2015 (186).

Unlike stock market indices, the Hagerty Market Index is adjusted for inflation via the Consumer Price Index. So these are “real” changes in price levels.

The index has now fallen nearly 7 points below the level of August 2014. That was three years ago! In fact, the index is now at the lowest level since March 2014.

The chart below from Hagerty’s August report shows how the index surged 83% on an inflation-adjusted basis from August 2009 to its peak in September 2015, and how it has since given up one-third of those gains. This is what the inflation and deflation of an asset bubble looks like (I added the dates):

https://i2.wp.com/wolfstreet.com/wp-content/uploads/2017/08/US-classic-cars-Hagerty-market-index-2017-08.png

During the Financial-Crisis, the index peaked in April 2008 at 121.0, then plunged 16% (20 points) to bottom out in August 2009 at 101.39. By then, the liquidity from the Fed’s zero-interest-rate policy and QE was washing across the world, and all asset prices began to soar.

The current drop of 15% from the peak in “real” terms is just below the 16% drop during the Financial Crisis. But the current 28.4-point-drop from the peak exceeds the 20-point drop during the Financial Crisis.

Concerning the current market, the Hagerty report added:

While the auction activity section of the rating had been kept strong by increases in the number of cars sold at auction so far this year, the trend hasn’t continued and auction activity decreased for the second consecutive month thanks to a 2% drop in the number of cars sold compared to last month.

Private sales activity also experienced its second consecutive decrease, again thanks to a small drop in the average sale price as well as a small drop in the number of vehicles selling for above their insured values.

The number of owners expressing the belief that the values of their vehicles are increasing continues to gradually decline, and this is true for the owners of both mainstream and high-end vehicles. The drop is particularly pronounced, however, for owners of previously hot models like the Ferrari 308 and Ford GT.

For the second month in a row, expert sentiment dropped more than any other section.

The asset class of vintage automobiles was among the first bubbles to pop. This didn’t happen in one fell swoop. It’s a gradual process that started in the fall of 2015, and observers brushed it off because it was just a minor down tick as so many before. But since then, it has become relentless and persistent, with plenty of ups and downs. Every expression of hope that it would end soon has been frustrated along the way.

And every day, there’s still hope. For example, back in May, the Hagerty report commented that “prices have started to normalize.” Since then, the index has continued its methodical decline.

This may be what asset class deflation looks like under the new regime. There will be talk of “plateauing,” as is currently the case in commercial real estate. Then there will be talk of prices “normalizing,” as is the case in collector cars. Then there will be talk of “buying opportunities,” and so on. And there are ups and downs, and this may drag on for years.

But month after month, buyers of vintage cars become a little less enthusiastic and sellers a little more eager. Yet, unlike during the Financial Crisis, there are no signs of panic. The tsunami of liquidity is as powerful as before. Financial conditions are easier than they were a year ago. There’s no forced selling. Just an orderly one-step-at-a-time asset bubble deflation.

Now the Fed is tightening. QE ended about the time the classic car bubble peaked. The Fed has raised its target for the federal funds rate four times so far in this cycle. It will likely announce the QE unwind in September and “another rate hike later this year,” New York Fed president William Dudley told the AP. And the below-target inflation is not a problem. Read… Fed’s Dudley Drops Bombshell: Low Inflation “Actually Might Be a Good Thing”

By Wolf Richter | WolfStreet

Fed Warns Markets “Vulnerable to Elevated Valuations” [charts]

Hussman Predicts Massive Losses As Cycle Completes After Fed Warns Markets “Vulnerable to Elevated Valuations”

Buried deep in today’s FOMC Minutes was a warning to the equity markets that few noticed…

This overall assessment incorporated the staff’s judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets…

According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.

According to one view, the easing of financial conditions meant that the economic effects of the Committee’s actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.

Roughly translated means – higher equity prices are driving financial conditions to extreme ‘easiness’ and The Fed needs to slow stock prices to regain any effective control over monetary conditions.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/14/20170816_FOMC11.png

And with that ‘explicit bubble warning’, it appears the ‘other’ side of the cycle, that Hussman Funds’ John Hussman has been so vehemently explaining to investors, is about to begin…

Nothing in history leads me to expect that current extremes will end in something other than profound disappointment for investors. In my view, the S&P 500 will likely complete the current cycle at an index level that has only 3-digits. Indeed, a market decline of -63% would presently be required to take the most historically reliable valuation measures we identify to the same norms that they have revisited or breached during the completion of nearly every market cycle in history.

The notion that elevated valuations are “justified” by low interest rates requires the assumption that future cash flows and growth rates are held constant. But any investor familiar with discounted cash flow valuation should recognize that if interest rates are lower because expected growth is also lower, the prospective return on the investment falls without any need for a valuation premium.

At present, however, we observe not only the most obscene level of valuation in history aside from the single week of the March 24, 2000 market peak; not only the most extreme median valuations across individual S&P 500 component stocks in history; not only the most extreme overvalued, overbought, over bullish syndromes we define; but also interest rates that are off the zero-bound, and a key feature that has historically been the hinge between overvalued markets that continue higher and overvalued markets that collapse: widening divergences in internal market action across a broad range of stocks and security types, signaling growing risk-aversion among investors, at valuation levels that provide no cushion against severe losses.

We extract signals about the preferences of investors toward speculation or risk-aversion based on the joint and sometimes subtle behavior of numerous markets and securities, so our inferences don’t map to any short list of indicators. Still, internal dispersion is becoming apparent in measures that are increasingly obvious. For example, a growing proportion of individual stocks falling below their respective 200-day moving averages; widening divergences in leadership (as measured by the proportion of individual issues setting both new highs and new lows); widening dispersion across industry groups and sectors, for example, transportation versus industrial stocks, small-cap stocks versus large-cap stocks; and fresh divergences in the behavior of credit-sensitive junk debt versus debt securities of higher quality. All of this dispersion suggests that risk-aversion is rising, no longer subtly. Across history, this sort of shift in investor preferences, coupled with extreme overvalued, overbought, over bullish conditions, has been the hallmark of major peaks and subsequent market collapses.

The chart below shows the percentage of U.S. stocks above their respective 200-day moving averages, along with the S&P 500 Index. The deterioration and widening dispersion in market internals is no longer subtle.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/14/20170816_huss.png

Market internals suggest that risk-aversion is now accelerating. The most extreme variants of “overvalued, overbought, over bullish” conditions we identify are already in place.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/14/20170816_huss1_0.png

A market loss of [1/2.70-1 =] -63% over the completion of this cycle would be a rather run-of-the-mill outcome from these valuations. All of our key measures of expected market return/risk prospects are unfavorable here. Market conditions will change, and as they do, the prospective market return/risk profile will change as well. Examine all of your investment exposures, and ensure that they are consistent with your actual investment horizon and tolerance for risk.

Source: ZeroHedge

Serious Credit Card Delinquencies Rise for the Third Straight Quarter: Trend Not Seen Since 2009

Every quarter, the New York Fed publishes a report on Household Debt and Credit.

The report shows serious credit card delinquencies rose for the third consecutive quarter, a trend not seen since 2009.

Let’s take a look at a sampling of report highlights and charts.

Household Debt and Credit Developments in 2017 Q2

  • Aggregate household debt balances increased in the second quarter of 2017, for the 12th consecutive quarter, and are now $164 billion higher than the previous (2008 Q3) peak of $12.68 trillion.
  • As of June 30, 2017, total household indebtedness was $12.84 trillion, a $114 billion (0.9%) increase from the first quarter of 2017. Overall household debt is now 15.1% above the 2013 Q2 trough.
  • The distribution of the credit scores of newly originating mortgage and auto loan borrowers shifted downward somewhat, as the median score for originating borrowers for auto loans dropped 8 points to 698, and the median origination score for mortgages declined to 754.
  • Student loans, auto loans, and mortgages all saw modest increases in their early delinquency flows, while delinquency flows on credit card balances ticked up notably in the second quarter.
  • Outstanding student loan balances were flat, and stood at $1.34 trillion as of June 30, 2017. The second quarter typically witnesses slow or no growth in student loan balances due to the academic cycle.
  • 11.2% of aggregate student loan debt was 90+ days delinquent or in default in 2017 Q2.

Total Debt and Composition:

https://mishgea.files.wordpress.com/2017/08/household-debt-2017-q2a.png?w=768&h=545

Mortgage Origination by Credit Score:

https://mishgea.files.wordpress.com/2017/08/household-debt-2017-q2b.png?w=988&h=700

Auto Origination by Credit Score:

https://mishgea.files.wordpress.com/2017/08/household-debt-2017-q2d.png?w=975&h=700

30-Day Delinquency Transition:

https://mishgea.files.wordpress.com/2017/08/household-debt-2017-q2e.png?w=994&h=700

90-Day Delinquency Transition:

https://mishgea.files.wordpress.com/2017/08/household-debt-2017-q2f.png?w=941&h=700

Credit card and auto loan delinquencies are trending up. The trend in mortgage delinquencies at the 30-day level has bottomed. A rise in serious delinquencies my follow.

By Mike “Mish” Shedlock

Global Financial Stress Index Spikes Most Since 2011 US Downgrade

Did central banks just lose control of the world… again?

For the first time in four months, BofAML’s Global Financial Market Stress index has turned positive – signalling more market stress than normal.

As the spat between North Korea and the U.S. worsened, a measure of cross-asset risk, hedging demand and investor flows awakened from its torpor (after spending 78 straight days below zero – with stress below normal).

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/08/20170812_GFSI1.jpg

The problem the world faces is… did the world’s central bank money-printing safety net just lose its plunge protection power?

For context, this is the biggest spike in the Global Financial Stress Index since the US ratings downgrade in August 2011 – and a bigger shock than the August 2015 China devaluation…

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/08/20170812_GFSI.jpg

… Michael Pento sits down with best selling author and National security expert Jim Rickards to talk about North Korea, debt the stock markets and when this all unravels.

Source: ZeroHedge

A New York City Taxi Medallion Only Cost $1.3 Million In 2014

https://i2.wp.com/www.crainsnewyork.com/apps/pbcsi.dll/storyimage/CN/20170109/PHOTOFINISH/170109916/AR/0/Taxi-medallion.jpg&imageversion=widescreen&maxw=770

(CNBC) Ride-hailing apps such as Uber and Lyft have been so disruptive to New York City’s taxi industry, they are causing lenders to fail.

Three New York-based credit unions that specialized in loaning money against taxi cab medallions, the hard-to-get licenses that allow the city’s traditional cab fleet to operate, have been placed into conservatorship as the value of those medallions has plummeted.

Just three years ago, cab owners and investors were paying as much as $1.3 million for a medallion. Now they are worth less than half that, and some medallion owners owe more on their loans than the medallions are worth.

“You’ve got borrowers who are under water. This is just like the subprime loan crisis,” said Keith Leggett, a credit union analyst and former senior economist at the American Bankers Association.

LOMTO Federal Credit Union, which was founded by taxi drivers in 1936 for mutual assistance, was placed into conservatorship by the National Credit Union Administration on June 26 “because of unsafe and unsound practices.”

New York City has the nation’s largest taxi industry, with more than 13,000 medallions.

Marcelino Hervias bought his medallion in 1990 for about $120,000 and thought its value would hit $2 million by the time he was ready to retire.

Instead, the 58-year-old said he owes $541,000 and is driving 12 to 16 hours a day to make ends meet.

“I celebrate my kids’ birthdays over the phone. Why?” Hervias said.

While some medallions are held by large owners with fleets, owning a single medallion was long seen as a ticket to the middle class for immigrants like Hervias, who is from Peru.

Many of them now owe more on their medallion loans than they originally paid for the medallions because they used their equity in the medallion for a home, a child’s education or other expenses.

Hervias said he borrowed against his medallion to pay for medical care for his mother, a new car and a visit to his homeland.

“Every time we want to go on vacation or do something, where do we go? To the equity of the medallion,” he said.

Other medallion owners tell similar stories.

Constant Granvil bought his medallion for $102,000 in 1987 and said he now owes more than $300,000 to his lender. He could have sold the medallion for two or three times that a few years ago, “but I said no, I’m not going to sell it,” said Granvil, who is 76. “And then I got caught.”

The value of Granvil’s medallion is hard to pinpoint because 2017 sale prices have varied from the $200,000s to the $500,000s depending on whether lenders are willing to finance the purchase.

Meanwhile, Granvil, who no longer drives because of poor health and uses a broker to hire a driver, said he is facing threats from the lender, Melrose Credit Union, to foreclose on not just his medallion, but also his house.

“How am I going to live?” he said. “And now Melrose wants to take my house?”

The New York State Department of Financial Services took possession of Melrose Credit Union in February and appointed the NCUA as conservator.

Critics say the federal agency is playing hardball with medallion owners like Granvil, who have been making their payments, by demanding that they pay off their loans in full or face foreclosure.

“They’re approaching it with this cookie-cutter idea,” said David Beier, head of the Committee for Taxi Safety, an association of taxi leasing agents. “They want you to mortgage your house to them as collateral. It’s forcing borrowers into bankruptcy.”

John Fairbanks, a spokesman for the NCUA, said that the agency has hired a management team to run Melrose and that it would be inappropriate to comment on the management team’s actions.

Supporters of the yellow cab industry have sued and pushed for city legislation to try to level the playing field between taxis and ride-hailing apps, which they say enjoy advantages like not paying a public transportation improvement surcharge that’s levied on yellow cabs and not having to outfit a percentage of cars with disabled-access features.

City Council member Ydanis Rodriguez, who chairs the council’s transportation committee, called this week for a panel to investigate the fall in medallion values.

According to a Morgan Stanley report, there were 11.1 million yellow cab trips in the city in April 2016, compared with 4.7 million Uber trips and 750,000 Lyft trips. The 11.1 million taxi rides were 9 percent fewer than the April 2015 number.

Some observers believe that the yellow cab’s market share will continue to shrink and that the value of a medallion won’t recover.

“This is a commodity that has been fundamentally disrupted,” said Leggett, who has written about medallion loans in his online newsletter Credit Union Watch. “I don’t see the value of the medallions getting close to what they were.”

Greenspan Nervous About Bond Bubble

https://tse4.mm.bing.net/th?id=OIP.y37-EDY0aF-MRQCrDknuwQERDk&w=256&h=200&c=7&qlt=90&o=4&pid=1.7Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

While the consensus of Wall Street forecasters is still for low rates to persist, Greenspan isn’t alone in warning they will break higher quickly as the era of global central-bank monetary accommodation ends. Deutsche Bank AG’s Binky Chadha says real Treasury yields sit far below where actual growth levels suggest they should be. Tom Porcelli, chief U.S. economist at RBC Capital Markets, says it’s only a matter of time before inflationary pressures hit the bond market.

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”

Stocks, in particular, will suffer with bonds, as surging real interest rates will challenge one of the few remaining valuation cases that looks more gently upon U.S. equity prices, Greenspan argues. While hardly universally accepted, the theory underpinning his view, known as the Fed Model, holds that as long as bonds are rallying faster than stocks, investors are justified in sticking with the less-inflated asset.

https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ihXc5XfbOfv0/v2/800x-1.png

Right now, the model shows U.S. stocks at one of the most compelling levels ever relative to bonds. Using Greenspan’s reference of an inflation-adjusted measure of bond yields, the gap between the S&P 500’s earnings yield of 4.7 percent and the 10-year yield of 0.47 percent is 21 percent higher than the 20-year average. That justifies records in major equity benchmarks and P/E ratios near the highest since the financial crisis.

If rates start rising quickly, investors would be advised to abandon stocks apace, Greenspan’s argument holds. Goldman Sachs Group Inc. Chief Economist David Kostin names the threat of rising inflation as one reason he isn’t joining Wall Street bulls in upping year-end estimates for the S&P 500.

While persistently low inflation would imply a fair value of 2,650 on the benchmark gauge, the more likely case is a narrowing of the gap between earnings and bond yields, Kostin says. He is sticking to his estimate that the index will finish the year at 2,400, implying a drop of about 3 percent from current levels.

That’s no slam dunk, as stocks have proven resilient to bond routs so far in the eight-year bull market. While the 10-year Treasury yield has peaked above 3 percent just once in the past six years, sudden spikes in yields in 2013 and after the 2016 election didn’t slow stocks from their grind higher.

Those shocks to the bond market proved short-lived, though, as tepid U.S. growth combined with low inflation to keep real and nominal long-term yields historically low.

That era could end soon, with the Fed widely expected to announce plans for unwinding its $4.5 trillion balance sheet and central banks around the world talking about scaling back stimulus.

“The biggest mispricing in our view across asset classes is government bonds,’’ Deutsche Bank’s Chadha said in an interview. “We should start to see inflation move up in the second half of the year.”

By Oliver Renick and Liz McCormick | Bloomberg