Newsbud Exclusive- Latent Economic Risks Are High & Rising

A 372-point drop in the Dow Jones Industrial Average on Wednesday, May 17th, 2017 seemed to only register a fractional blip on the concern map of many an analyst and government-compliant economist.  Volatility is present, sure, yet for the most part it was rendered innocuous structurally, being rather blamed on acute political concerns involving Donald Trump’s agenda, and especially considering the gains in the equity markets in subsequent days.

That is not OK.  Neither is the acute display of volatility in said markets, nor the blasé response to them from inter-reliant governmental, media and academic official-dom.  Rather, both phenomena are reflective of the general public’s oblivion – like boiling frogs in slowly heating pots – about the true state of the tightly linked US and European economies, especially when it comes to latent, rising risks.

Debt: Enemy #1

The material and psychological burdens which debt places on consumers, institutions and whole nations can prove pivotal regarding the public’s confidence in the economy, or lack thereof.  Oddly, Americans are misinformed about both the collective quantity and nature of debt in the system.  Being kept in the dark, especially regarding what said excessive debt could eventually do to the system, is seemingly by design and for the sake of maintaining said manufactured levels of confidence.

However, consumer debt levels are at nearly $13 trillion, with corporate and government debt at nearly $30 trillion and approaching $23 trillion, respectively.  The US Debt to GDP ratio is over 104%, and has steadily risen over the years.

Source:  http://www.tradingeconomics.com/united-states/government-debt-to-gdp

Rising longer term debt levels were partly due to the US economy transforming from a post-World War II manufacturing, production and infrastructure development-driven one, to a service, technology and speculative finance-driven economy.  Economic “growth” thus became increasingly calculated via an altered GDP measure as well as the routine performance evaluation of the equity and bond markets.  As analyst Lance Roberts astutely observes, said changes led to gradual drops in workers’ wage levels over the decades:  “The decline in economic output was further exacerbated by increased productivity through technological advances and outsourcing of manufacturing which plagued the economy with steadily decreasing wages.”  High debt, coupled with dropping wages, is a recipe for disaster when it comes to long term standards of living.  Per Roberts, as Americans’

wages declined, they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom. By the end of 2007, the household debt outstanding had surged to 140% of GDP.

Credit and debt expansion have dangerously ‘Fed the American Dream’ since roughly 1980, as banks and other lending institutions grew wealthy at an unprecedented pace.

Source: https://realinvestmentadvice.com/the-great-american-economic-growth-myth/

The gargantuan levels of debt resulting from decades of real estate, mortgage, equity and derivative innovations slash speculation have led to a debt overhang of some $35 trillion which must eventually ‘clear out’, or adjust lower, by mathematical necessity.  Then, consumer institutional savings rates and increasingly sustainable investment patterns based on more tangible standards can return.

“*Structural Debt Level – Estimated trend of debt growth in a normalized economic environment which would be supportive of economic growth levels of 150% of debt-to-GDP.”  Source: Ibid.

The US Fed has already raised, and is considering doing further raising of, interest rates.  Yet due to the nature of corporate and sovereign debt burdens, it ultimately cannot raise rates in a substantive enough fashion to defend the dollar in the long run.  The IMF recently sounded alarm over the dangers of rising interest rates against nearly the highest levels of corporate debt and leverage.  Per the IMF via ZeroHedge, corporate

earnings have dropped to less than six times interest expense close to the weakest multiple since the onset of the global financial crisis … Such a sharp rise in interest rates amid tepid earnings growth could further compromise the ability of firms to service their debtUnder this scenario, the combined assets of [fiscally] challenged firms could reach almost $4 trillion.

Heavily debt challenged firms have spread across the energy, real estate and utilities sectors, accounting “for about half of firms struggling to meet debt service obligations and higher borrowing costs … As for the biggest risk denoted by the IMF [is] the threat of mass defaults should interest rates spike making debt service impossible for up to 22% of US corporations”.

Source:  https://www.imf.org/en/Publications/GFSR/Issues/2017/03/30/global-financial-stability-report-april-2017 via ZeroHedge

The IMF also reveals how the “ratio of earnings to interest payments is worsening … There are some $4 trillion worth of companies at risk if U.S. plans for fiscal stimulus [I.E. further quantitative easing, or essentially, money printing] are enacted but don’t significantly boost the economy.”

Source: MarketWatch.com

 Debt financing has been utilized further by the corporate sector while the credit fundamentals of firms have been weakening, “which create the conditions that can precede a credit cycle downturn.”  Meanwhile, the government continues rewarding speculators, as expected tax reform dividends “may accrue mainly to sectors that have engaged in substantial financial risk taking.”

Other Risk Factors:  Real Estate, Retail Sales, Volatility

Although books can be – and have been - written on the myriad risks facing expected further economic stability in the US, we’ll continue briefly with only a couple of other bullet points.  Commercial real estate (CRE), for one, as a sector retains risks which could pose systemic risks to banks.  Boston Federal Reserve President Eric Rosengren warned about a CRE lending bubble.  Per Business Insider, “[r]eal estate has a significant financial stability implication because real estate tends to be leveraged by the owners, and those loans represent a significant exposure for financial institutions that are themselves highly leveraged.”  Collectively, real estate as an investment category holds over $14 trillion worth of loans, spread out between CRE loans ($3.8 trillion) and residential mortgages ($10.3 trillion).  Smaller banks are over-exposed to CRE loans, begging the question over further bank culling approaching a la 2008 - 2010.  Since 2016, “holdings of commercial mortgages by the banking sector have increased 8.9%, while bank holdings of multifamily mortgages have increased 12.0%.  This growth has occurred while bank supervisors have been cautioning about the potential risks emanating from the high valuations in some sectors of the real estate market.”

Retail sales numbers are plummeting as major, historically vital retailers such as Sears and JC Penney are on the verge of outright failure.  Other major retailers such as Payless, Macy’s and even previously sector leading major technology firms are also suffering.  As of March, 2017, retail sales figures had the largest two-month drops in over two years (below).

Source: TheBurningPlatform.com

Per Yahoo Finance, more “than 3,500 [retail] stores are expected to close over the next several months … Traditional retailers with large fleets of physical stores have been hit the hardest.”

Source:  Business Insider / Yahoo Finance

Although brick and mortar store closures are blamed on the rising efficiencies presented by online purchasing options, the underlying realities behind store and whole mall closures has more to do with higher unemployment than “officially” reported and again, weakening income growth.

Source:  TheBurningPlatform.com

Tellingly, further scrutinizing of the so-called “fear gauge” is back, as it was eight to ten years ago.  I.E. The Chicago Board Options Exchange Volatility Index, or VIX for short, which measures levels of near-term equity volatility risk as gathered through the S&P 500 stock index option prices.  The VIX has risen as of late, which can only logically dovetail into what was referenced at the start of this article regarding the Dow’s aggressive drop last week.

Source: http://www.marketwatch.com/investing/index/vix/charts

Relatedly, the levels of shorting interest by investors have risen as well.  This indicates that further equity losses have been, and continue to be, expected by investors.  The core measurement vehicle for gauging such shorting interest is the SPDR S&P 500 ETF, the rather telling one year chart for which is listed below.

Source:  Yahoo Finance

Clearly, there are plenty of other indicators, metrics and means for taking the pulse of an overleveraged economic system that presents dissipating returns to hard working Americans.  I just thought I’d list a few, taking acute snapshots of current data, hoping that readers will in turn track said data for themselves.

We face serious economic and thus political consequences resulting from decades of a macro level of profligacy which resulted from a collusion of corporate and governmental/regulatory actions.  How the US government – and, crucially, foreign-based ruling banking institutions such as the IMF and Bank for International Settlements – intend to either work collectively toward a ‘soft landing’ equivalent (as much as possible, certainly) versus a purposeful, ‘Creative Destruction’-driven sense of aggressive transnational asset consolidations, is a separate subject worth tracking.  Yet the size and nature of the stakes, when viewed with clarity through viable economic metrics, should ideally drive citizens, investors and analysts toward attaining the requisite tools for provisioning a rare sense of preparation for what is approaching.

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 Pye Ian, Newsbud Senior Analyst & Commentator, is an independent economic and geopolitical researcher as well as a strategic planning and business development advisor.  His articles and analyses on international affairs, economic trends and cultural topics have been published in various mainstream and alternative press sources. Mr. Ian’s wider intellectual interests are reflected in his writings on the convergence of foreign affairs, political philosophy, history, global finance and energy policy. He has undergraduate degrees in economics and political science from the University of California and a Master’s degree in finance from Cambridge University. In addition to English, Mr. Ian has proficiency in Farsi.

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Comments

  1. Russell Linz says:

    The boom and bust bubbles exacerbated if not created by the Federal Reserve (central bank) has been a mathematical disaster when created. The simple notion of creating money from debt is a dog chasing its tail. Eventually the dog will grow tired and collapse our will simply die.

  2. victor friese says:

    Please cover the student loan debacle. There are supposed to be 12 million defaults this year and I myself am one of the permascrewed.

  3. Andreas Hedqvist says:

    While following the House Financial Services Committee’s hearing yesterday entitled ‘The Federal Reserve’s Impact on Main Street, Retirees, and Savings’ I was struck by the rather wide range of knowledge and competence among Committee members. It was apparent that most were not aware of the Federal Reserve System’s policy nor decision making. As I also believe most people are unaware of, the Fed is a private entity that works and sets policy based upon the interests of its share holders which are the large financial institutions. It is NOT in their interest to serve the general public. I am quite amazed at how many people actually believe that. The recent rate hike by Janet Yellen is quite obvious when viewed from this perspective – it is meant to accelerate earnings for the big banks’ overnight bank funding at the Fed. One may speculate about the underlying reason and I would argue that they foresee a serious correction to the Dollar. The Treasury bond buying program by the NYFed (covertly) cannot continue indefinitely and certainly not if the already high selling pressure increases, this may occur very soon. I think the rate hike was a serious mistake.

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