Bad News: “This Is The Worst Global Dollar GDP Recession In 50 Years”, Deutsche Calculates
The following brief summary of
the global economic situation should, once and for all, end all debate
about whether the world is “recovering” or is now mired deep in a
recession.
From DB’s 2016 Credit OutlookDebt has continued to climb since the crisis with Global Debt/GDP still on the rise, with no obvious sign of when this rise stops for many major countries. Indeed much of the post GFC increase in debt has been raised on the back of the commodity super-cycle which is currently unraveling in EM and the US HY market. Outside of this, the US overall has de-levered to some degree but even there debt levels remain very high relative to all of history excluding the GFC period.
With limited tolerance from the authorities to see defaults erode the huge debt burden, the best hope for a more normal financial system is for activity levels to increase so we can slowly grow the economy into the debt burden. However this requires strong nominal GDP growth and we continue to see the opposite. The left hand graph of Figure 6 looks at a global weighted average of Nominal GDP growth in the G7. On this measure we are still seeing historically weak activity.
In dollar terms the situation is even worse. The right hand chart of Figure 6 shows a much more volatile global NGDP series which converts the size of each economy in dollar terms and then looks at the growth rate YoY. With the recent strength in the USD we are seeing a huge global dollar nominal GDP recession – the worst since the 1960s. Whilst this might not be a series that is followed, it does show the sharp contraction of dollar activity levels in the global economy over the last year or so which has to have ramifications given it’s the most important global financial market currency.
Here is how the conventional wisdom recalls this development:
On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to “bail out” one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. CEO James Cayne and other senior executives worried about the damage to the company’s reputation. The funds were invested in thinly traded collateralized debt obligations (CDOs). Merrill Lynch seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs,prompting a mark-down of similar assets in other portfolios. Richard A. Marin, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers.The rest is history.
We bring up this part of ancient financial history, because while looking at Stone Lion Capital Partners – the first hedge fund that gated investors as reported last night (Third Avenue’s likewise gating high yield fund was technically a mutual fund) – something curious emerged.
Here are the founders of Stone Lion Capital: Alan Mintz and Gregory Hanley. Those names sounded awfully familiar… and then we remembered why:
- Alan Jay Mintz, CPA, a co-founder of Stone Lion Capital was Co-Head of the Distressed Debt and High Yield trading group at Bear Stearns
- Gregory Augustine Hanley, a co-founder of Stone Lion Capital was Co-Head of the Distressed Debt and High Yield trading group at Bear Stearns
Wall Street’s proclivity to create serial equity bubbles off the back of cheap credit has once again set up the middle class for disaster. The warning signs of this next correction have now clearly manifested, but are being skillfully obfuscated and trivialized by financial institutions. Nevertheless, here are ten salient warning signs that astute investors should heed as we roll into 2016.
- The Baltic Dry Index, a measure of shipping rates and a barometer for worldwide commodity demand, recently fell to its lowest level since 1985. This index clearly portrays the dramatic decrease in global trade and forebodes a worldwide recession.
2. Further validating this significant slowdown in global growth is the CRB index, which measures nineteen commodities. After a modest recovery in 2011, it has now dropped below the 2009 level—which was the nadir of the Great Recession.
3. Nominal GDP growth for the third quarter of 2015 was just 2.7%. The problem is Ms. Yellen wants to begin raising rates at a time when nominal GDP is signaling deflation and recession. The last time the Fed began a rate hike cycle was in the second quarter of 2004. Back then nominal GDP was a robust 6.6%. Furthermore, the last several times the Fed began to raise interest rates nominal GDP ranged between 5%-7%.
4. The Total Business Inventories to Sales Ratio shows an ominous overhang: sales are declining as inventories are increasing. This has been the hallmark of every previous recession.
5. The Treasury Yield curve, which measures the spread between 2 and 10 Year Notes, is narrowing.Recently, the 10-year benchmark Treasury bond saw its yield falling to a three-week low, while the yield on the Two-year note pushed up to a five-year high. This is happening because the short end of the curve is anticipating the Fed’s December hike, while the long end is concerned about slow growth and deflation.
Banks, which borrow on the short end of the curve and lend on the long end, are less incentivized to make loans when this spread narrows. This chokes off money supply growth and causes a recession.
6. S&P 500 Non-GAAP earnings for the third quarter were down 1%, and on a GAAP basis earnings plummeted 14%. It is clear that companies are desperate to please Wall Street and are becoming more aggressive in their classification of non-recurring items to make their numbers look better. The main point is why pay 19 times earnings on the S&P 500 when earnings growth is negative–especially when those earnings appear to be aggressively manipulated by share buy backs and through inappropriate charges.
Headlines:
Third Avenue Ripples Hit Credit in Europe as Bond Risk Rises
Bloomberg–2 hours ago
The Markit iTraxx Asia index of credit-default swaps on corporate and sovereign debt, rose 2 basis points to 146 basis points as of 2:17 p.m. in Hong Kong, …
Junk Bonds Stagger as Funds Flee
Wall Street Journal – ?15 hours ago?
Traders and regulators have fretted for more than a
year that mayhem might ensue if U.S. mutual funds sought to sell rarely
traded bond investments. After junk–bond prices posted their largest drop since 2011 on Friday, investors say they are bracing …
Wall Street fears a run on junk bonds — and worse
CBS News – ?5 hours ago?
Fasten your seat belts, investors. We may be in for
a bumpy ride. Large-cap U.S. stocks suffered their worst one-day loss
since September last Friday as many popular big-tech stocks — such as
Amazon (AMZN) and Facebook (FB) — rolled over. And it …
Junk Rated Stocks Flashing Same Signal as High-Yield BondMarket
Bloomberg – ?9 hours ago?
Think equity investors have been blind to warning signs coming from junk bonds?
Not quite. For most of the year pessimists have warned that equity
markets were missing signals in high-yield credit, where losses
snowballed even as gauges like the …
ECB’s Mario Draghi committed to further stimulus if needed
Financial Times–3 hours ago
They also cut their deposit rate to a fresh record low
of minus 0.3 per cent and agreed to buy municipal bonds alongside
standard sovereign debt.
PBOC Defends Stance After Yuan Hits Four-Year Low
Nasdaq – ?11 hours ago?
Investors sold off the currency on speculation that the Chinese central bank
would allow further weakening of the yuan as part of its potential move
to loosen the yuan’s de facto peg to the U.S. dollar and instead let it
track a broad group of …
S&P Warns It Could Cut Anglo American Rating to Junk
Nasdaq–36 minutes ago
… a downgrade to junk status wouldn’t impact the company’s financing costs. Anglo had net debt of $13.5 billion as of the end of June, or $11.9 billion on the July …
Canadian Household Debt Hits Fresh High
Wall Street Journal – ?2 hours ago?
The country’s net worth declined 1.3% to C$9.49 trillion ($6.91 trillion)
in the third quarter, reflecting lower commodity prices. Excluding
natural resources, net worth rose 1.7%. The latest report on household debt comes just days after the Canadian …
Household debt level rises, hits 163.7 per cent of disposable income: StatsCan
CTV News – ?2 hours ago?
The increase came as disposable income increased 0.8 per cent, while household credit market debt grew 1.4. Total household credit market debt, which includes consumer credit, and mortgage and non-mortgage loans, reached $1.892trillion. Consumer …
Hong Kong Property Foreclosures Seen Doubling in 2016 on …
Bloomberg–11 hours ago
At risk was President Xi Jinping’s aim to keep the $10 trillion economy … Left with a $28 trillion debt overhang after that spree, a new tack is now being taken.
School pension bill to hit 30 percent of employee salaries next year
Bucks County Courier Times (subscription)–6 hours ago
“The underfunding of PSERS has been the largest contributor to the existing $37.3 billion pension debt,” the resolution stated. “Extending the use of rate collars …
‘Black Hole’ in Funds Causes Deficit in Pensions
Greek Reporter–Dec 13, 2015
It appears that IKA has drawn the short straw in regards to this “secret” debt, since the fund’s obligations to other public funds amounts to 11.26 billion euros.
Chicago teachers to announce whether they have votes for strike
Yahoo News–5 hours ago
The district, which serves about 400,000 students at more than 600 schools, faces a $1.1 billion structural deficit and thousands of possible teacher layoffs after …
1000 defined benefit pension plans ‘unlikely’ to pay in full
Financial Times – ?19 hours ago?
The analysis indicated that a new regulatory
objective, which allows employers to divert pension contributions to
invest in business growth, was in “direct conflict” with their role to
support trustees and simply served “to kick the [pension deficit …
Audit: Unfunded liabilities in public workers pension grow to over …
LIABILITIES GROW: The unfunded liabilities for one of North Dakota’s largest public worker pensions grew to over $680 million in 2015. The pension also added …
Walker looks at borrowing to balance Alaska budget
Alaska Dispatch News–18 hours ago
Walker is also proposing $2.5 billion in borrowing for pension obligation bonds, to pay annual costs towards the state’sunfunded liability. Hoffbeck said that …
Cost of public-sector pensions equal to 85% of GDP, thinktank warns
The Recorder Journal (blog)–17 hours ago
… which has the largest proportion of unfunded schemes of the three countries, has the biggest problem. The public-sectorpension cost in the USA and Canada …
NYSUT outlines $416 million in ‘liabilities’ to the union’s staff members
Albany Times Union–12 hours ago
That’s the amount of future liabilities owed by the New York State United Teachers to the union’s staff members, primarily for pension and health care costs, …
Kazakhstan CDS jump, Eurobonds fall after tenge hits record low
Reuters–5 hours ago
Data from Markit showed that five-year credit default swaps rose 23 basis points (bps) to 314 bps, the highest since late-October. Kazakh dollar-denominated …
Ouch! Here’s How Much the Average Obamacare Penalty Will Run …
Motley Fool–22 hours ago
We’re also seeing big dollar differences in the underlying price of health insurance plans. The failure of more than half of Obamacare’s approved healthcare …
14800 Minnesotans face deep cuts to their pensions
Minneapolis Star Tribune–14 hours ago
Retired Teamsters argue that the current solution unfairly shifts the burden of a bailout onto them. They have a right to what they have earned, they say. “If they’re …
No comments:
Post a Comment