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.

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.

While consumer spending is up on the previous year, the growth in spending has moderated to the lowest level in three years.

Economic growth is good. But what we want to see is job and wage growth to complement the asset-price growth. Without this catch up on the job and income front, the economy is on an unsustainable course.

One of the striking aspects of the Senate Permanent Subcommittee on Investigations hearing on Apple’s aggressive tax-avoidance strategies is the way the Senators bent over backwards to declare Apple love even as they poked and prodded at the tech giant’s various, um, devices. Being an icon of US tech prowess, even if the halo is slipping, will do that.

We speak of the case in which positive shocks are self-reinforcing, as a virtuous circle, and the case in which negative shocks are self-reinforcing as a vicious circle, but the important point is that these processes are part of the same system and are very common. It is usually a pretty safe bet, for example, that when an economy is surging forward at astonishing growth rates – rates which far exceeded anyone’s prior expectations – it has powerful positive feedback loops embedded within its economic institutions.

In my book I focus mostly on balance sheet feedback loops, but they also exist just as powerfully in the underlying economy.

Retail savers in the US are abandoning certificates of deposits (CDs). The amount of CDs outstanding that are $100K or smaller has been on a sharp decline since the recession and is now at the lowest level since the Fed began keeping track of these balances.

I have been arguing for several years that once China begins the adjustment process, which I expect to characterize the ten-year period of the current administration, growth rates must slow significantly. My expectation for long-term growth is that it shouldn’t average much above 3-4% annually. This is what it will take for household consumption to rise to roughly 50% of GDP in a decade if consumption growth can be maintained at its historic rates of around 8%.

But I always warn that this is likely to be an upper limit, not a lower limit, to growth The key is whether or not it is possible to maintain current levels of consumption growth once investment growth is sharply reduced. A recent paper by the IMF on the topic is very interesting and not encouraging.

By Marc Chandler The US jobs report offered a pleasant surprise after the string of mostly disappointing data. Private sector employment rose 165k and the Feb and March series were revised up by 114k jobs. The 3-and 6-month averages now stand at 215/216k. The unemployment rate fell to 7.5%, the lowest since December 2008. The one aspect of the report [...]

I just finished watching the ECB’s monetary policy committee press conference led by Mario Draghi. And the ECB has just announced a series of actions I believe constitute a new economic paradigm for the euro area, one that moves away from front-loaded austerity and comes with non-interest rate monetary accommodation. I want to briefly outline here what this means outside the paywall.

It seems that the markets are discounting many of the risks that have plagued Ireland’s economy in recent years. Ireland’s stock market has significantly outpaced the S&P500 in the last few months – ISEQ is up 20% over the past year.