February 17

Quarterly report on household debt and credit. FRBNY.
this data is a little dated, as more recent data has shown a touch of releveraging, but on a long-term trend basis:

Aggregate consumer debt continued to decline in the fourth quarter, continuing its trend of the previous two years. As of December 31, 2010, total consumer indebtedness was $11.4 trillion, a reduction of $1.08 trillion  (8.6%) from its peak level at the close of 2008Q3, and $155 billion (1.3%) below its September 30, 2010 level. Household mortgage indebtedness has declined 9.1%, and home equity lines of credit (HELOCs) have fallen 6.5% since their respective peaks in 2008Q3 and 2009Q1. For the first time since 2008Q4, consumer indebtedness excluding mortgage and HELOC balances did not fall, but rose slightly ($7.3 billion or 0.3%) in the quarter.  Consumers’ non-real estate indebtedness now stands at $2.31 trillion, the same level as in2010Q2, 8.4% below its 2008Q4 peak.

But if we get some further payroll growth, we should see more credit growth:

Intermezzo: the fight against credit contraction. macrofugue.

Rich valuations and poor market returns. John Hussman.

Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this “cyclically-adjusted P/E” or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990′s market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929. Of course, we observe richer multiples at the heights of the late-1990′s bubble, when investors got ahead of themselves in response to the introduction of transformative technologies such as the internet. After a market slide of more than 50%, investors again pushed the Shiller multiple beyond 24 during the housing bubble and cash-out financing free-for-all that ended in the recent mortgage collapse.

And here we are again. This is not to say that we can rule out yet higher valuations, but with no transformative technologies driving the economy, little expansion in capital investment, and ongoing retrenchment in consumer balance sheets, I can’t help but think that the “virtuous cycle” rhetoric of Ben Bernanke is an awfully thin gruel by comparison. We should not deserve to be called “investors” if we fail to recognize that valuations are richer today than at any point in history, save for the few months before the 1929 crash, and a bubble period that has been rewarded by zero total return for the S&P 500 since 2000. Indeed, the stock market has lagged the return on low-yielding Treasury bills since August 1998. I am not sure that even members of my own profession have learned anything from this....

While we can certainly find analysts who believe stocks are cheap, we can easily test the long-term accuracy of their methods (which often amount to nothing more than applying an arbitrary multiple to forward operating earnings, or dividing the forward earnings yield by the 10-year Treasury yield). Frankly, many of those alternative methods stink. Regardless of whether an analyst claims that stocks are cheap or expensive, they should be expected to provide some sort of evidence that their methods have a strong relationship with subsequent market returns.

The cognitive dissonance of it all. Kyle Bass, Hayman Advisers.

Per Chris Whalen, Wells Fargo's CFO quit due to an internal dispute over financial disclosures. zerohedge.

Victor Shih on the Chinese economy. The Browser. (Five Books)

February 7

QOTD1:
Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

QOTD2:
People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome. ~ George Orwell


Canadian corporate bonds an expensive proposition. FP.
according to PIMCO's Ed Devlin.

“The fundamental problem with the Canadian corporate bond market is that there is are too many investors chasing too few issuers,” Mr. Devlin said in a recent note to clients.

He noted that 59% of Canada’s main corporate bond benchmark is concentrated in just 10 issuers. By comparison the percentage of the index concentrated in 10 issuers is 20% in the U.S., 26% in Great Britain and 35% in the Eurozone.

Housing prices to drop 25%, [Capital Economics] forecaster predicts. The Star.

Negative annualized stock market returns for the next 10 years or longer? It's far more likely than you think. Mish.

Entranced by China's bubbling economy. Edward Chancellor, FT.

Mr Mansharamani starts out with George Soros’s theory of reflexivity.... markets are determined by a “two-way feedback mechanism in which reality helps shape the participants’ thinking process and the participants’ thinking helps shape reality”. Chaos rules as errors of perception feed back into reality.

The financial instability hypothesis of the late Hyman Minsky complements Mr Soros’s reflexivity.... already inflated asset prices can only be sustained by further price appreciation and ever increasing leverage. 

According to Mr Minsky, when Ponzi finance is widespread, the economy is likely to develop into a “deviation-amplifying system”. All great bubbles have easy money and growing leverage. Mr Mansharamani turns to Friedrich Hayek and the Austrian economists to show how inappropriately low interest rates fuel credit growth and over-investment.

Behavioural psychology also helps explain why bubbles develop. Humans have a chronic tendency to overconfidence. We underestimate the probability of events that we haven’t recently experienced... For instance,...  it was generally believed house prices could not fall because they had been on a continuously rising trend in earlier decades.

Mr Mansharamani surveys recent research into swarm behaviour in the insect world. While ants lay and follow trails of pheromone, the speculative crowd follows a trail of recently minted money. Politics provides yet another prism for identifying bubbles. Great speculative booms are often stimulated by governments, sometimes with the intent of lining the pockets of public officials. All bubbles are accompanied by fraud.

China today has the characteristics of a truly great bubble. The value of the housing stock is set to exceed 350 per cent of GDP this year... Construction accounts for around one-quarter of economic activity in China...

A reflexive process appears to be at work as the anticipation of future Chinese economic growth drives new construction, while new construction drives economic growth.

Ponzi finance proliferates in China. Wasteful infrastructure projects are funded with bank loans and land grants from local governments, which themselves depend on land sales for the bulk of their income. Chinese banks bypass credit restrictions by securitising loans to developers, while state-owned enterprises boost profits by dabbling in real estate. China’s financial system has become in Mr Minsky’s phrase a “deviation-amplifying system”.

February 1

The 5 Black Swans That Keep Dylan Grice Up At Night... And How To Hedge Against Them All. Dylan Grice via zerohedge.

Why credit deflation is more likely than mass inflation - an Austrian perspective. Pragmatic Capitalist.

The financial crisis of 2015: an avoidable crisis. Oliver Wyman.


Estimating the Macroeconomic Effects of the Fed's Asset Purchases. FRB San Fran.
long on modeling and simulations, short on facts; they concluded that QE is helpful, based on the assumption that credit costs have come down, but since QE2 has started, US 10s and bonds are up about 100bp each and the average 30-year mortgage rate also spiked 100bp, though has since come down somewhat, but is still up 60bp since autumn. In other words, nice P.R., but a little soft on real research



other fare:
Egypt and Obama. self-evident.