Credit Writedowns

The long-term trend in capacity utilization in the US shows a secular decline. After each major recession over the past 50 years, capacity utilization peaked at a lower level than after the previous recession. So far in the post-Great Recession recovery, this trend has not been violated, as the nation struggles from chronic excess capacity.

Spain and Italy reported today that the share of bad loans have continued to rise. There is nothing to suggest that this is the peak. In fact, further deterioration is likely.

In spite of the divergence in the chart, the “loans create deposits” axiom still stands – deposits are still created through bank credit. Two key developments explain much of this divergence without violating these principles.

Mortgage backed securities (MBS) have sold off sharply over the past month as fixed income markets face the new reality of rising rates. But unlike most other fixed income securities, MBS duration tends to increase with yield.

Once again, savers are punished – they either have to take risk (such as rate or credit risk) or live with 5bp (or less). Money markets simply have not benefited from higher interest rates.

I am a big believer in cloud computing. As storage and mobile bandwidth costs plummet, the ease of use that mobile devices give us makes the cloud compelling. The ability to access your data, your company’s data or someone else’s data anywhere and from any device is a huge boon to productivity in businesses and to ease of use to consumers. The NSA spying scandal casts this business model in a different light.

As mortgage rates in the US reach the highs not seen since early 2012, many are asking the key question: would this rise in rates impact the housing market or consumer sentiment?

Let’s be clear: it is the apathetic American people who have created this mess. They have allowed their government to operate in a veil of secrecy without any basic checks on power. If Americans don’t wake up and start demanding change, it will get much worse.

Europe has been postponing the recapitalisation of its banking sector. This column argues that it has been doing so for far too long. Without such a recapitalisation, the danger is that economic stagnation will continue for a long period, thereby putting Europe on a course towards Japanese-style inertia and the proliferation of zombie banks.

Australia’s central bank left rates on hold yesterday as was generally expected. The RBA continues to be quite hawkish as well as relatively optimistic on the nation’s economy. Given the “cash rate” is at historical lows at 2.75%, the board wants to leave room for further action should the need arise. There are only so many “bullets” left before you hit zero.

This is what has changed in the EM space in, our view. 1) Brazil is stepping up its defences against market volatility. 2) Signs that China is looking for more (and better) sources of external funding sources is mounting. 3) Turkish central bank governor Basci seems ready to take action to stabilize markets.

MPT is based on a number of assumptions, some of which are more restrictive than others. The question is whether the sum of those assumptions is so far off the mark that it renders the entire theory absolutely useless. Effectively the question is whether EMH, and with it MPT, should be ditched altogether.