Credit deflation and the reflation cycle to come.

[sancho panza]

Credit deflation

https://wolfstreet.com/2018/08/21/credit-card-balances-delinquencies-charge-offs/

Delinquencies soar past Financial-Crisis peak at the ca. 5,000 smaller US banks, and these are the Good Times. What’s going on?

The delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the nearly 5,000 smaller banks in the US – rose to 6.2% in the second quarter. This exceeds the peak during the Financial Crisis by a full percentage point and was up from 4.0% a year ago.

But for the largest 100 banks – which carry the majority of the credit-card loan balances – the delinquency rate was 2.4% (seasonally adjusted), the Federal Reserve Board of Governors reported Tuesday afternoon. So what is going on here?

A bank classifies credit card balances as “delinquent” when they’re 30 days or more past due. The rate is figured as a percent of total credit card balances. In other words, among the smaller banks, 6.2% of the outstanding credit card balances are now delinquent.

 

Some customers are able to catch up with their minimum payments, and their credit card balances are removed from the delinquency basket. Others are not able to catch up, and the bank tries to collect what it can. It then moves the balance out of the delinquency basket into the charge-off basket – when the loan is “charged off” against loan loss reserves.

These charge-offs among the largest 100 banks in Q2 rose a fraction year-over-year to 3.6% (seasonally adjusted).

But among the nearly 5,000 remaining banks, the charge-off rate spiked three full percentage points year-over-year to 7.8%, the highest since Q1 2010. The rate among smaller banks had peaked during the Financial Crisis in Q1 2010 at 8.4%:

Note that both charts above are about on the same scale, with the delinquency rates lower than the charge-off rates as delinquencies get moved out of the delinquency basket and into the charge-off basket.

Overall, across all commercial banks, the delinquency rate, at 2.5%, was flat with a year ago, pushed down by the largest 100 banks. The overall charge-off rate for all banks rose slightly year-over-year to 3.7% up. What’s going on is this…

Subprime comes calling.

The charts above show just how badly the largest 100 banks had gotten hit with losses on their credit card balances during the Financial Crisis as consumers, many of whom had lost their jobs, could no longer keep up with their minimum payments. At the same time, the smaller banks had experienced smaller losses.

This was a lesson for those big banks. Since then, their underwriting has become tighter, and their marketing has been focused on the best potential customers that they’re luring with big cash-back offers, juicy frequent flier credits, and other incentives.

Smaller banks can’t offer those kinds of goodies, and cannot compete on that level, and so they marketed to a particularly profitable group, consumers with lower incomes, no savings, and weaker credit – many of them with subprime credit ratings – that they charged stupendous interest rates, sometimes exceeding 30%, creating a situation where consumers can’t even keep up with the interest charges. Profits were initially huge, but so is now the hangover – see the delinquency and charge-off rates above.

These losses on credit card loans at the smaller banks aren’t triggered because people lost their jobs in a recession. The economy is as strong as it has been in years, and people are working. These losses are happening during good times!

But the subprime segment of credit cards is concentrated at smaller banks because they targeted those customers to maximize their profits, and that subprime segment of customers is running into difficulty not because they lost their jobs, but because they borrowed too much at interest rates that are too high because the banks got too greedy with their most vulnerable customers.

Credit-card loans amount to about $1 trillion. The nearly 5,000 smaller banks hold only a small portion of it. And some of that portion is curdling. This does not jeopardize the financial system. But it does show that among the most vulnerable consumers, the borrowing binge is hitting limits. Credit begins to unravel at the margin.

Total consumer debt, not including housing-related debt, rose 4.8% in the second quarter from a year earlier, to $3.9 trillion, the highest ever. Let the good times roll.

[BearyBear]

I had a look at https://www.royalmintbullion.com/Products/Britannia/Gold/BB18CBGC and their current price is £998.66 which is $1288.27 (current GBPUSD rate is 1.2911) vs Gold price $1195! That's a difference, do they update prices at all, or is it normal? Also, what's the risk associated with buying unleveraged Gold ETFs?

[DurhamBorn]

2 hours ago, Majorpain said:

This is what i imagine 2001 looked like at the time, buy Tech and youll be rich!  

The extra $460-470 bn in value that Amazon gained since Aug/Sept 17 alone would place it about the 26th largest economy in the world.

The total Mcap of $920bn is not for off the GDP of Indonesia, a country with a population of 261 Million....

Emotions (greed) are in charge, thus there is no way of knowing when it will turn.  Anyone shorting this is a braver man than I!

One good thing about shorting Amazon is that at least you wont get caught out by a takeover offer.I dont like leveraged products though as the costs slowly chip away at your capital and i dont really want to lock up capital shorting it without leverage.

[MrXxx]

8 hours ago, BearyBear said:

I had a look at https://www.royalmintbullion.com/Products/Britannia/Gold/BB18CBGC and their current price is £998.66 which is $1288.27 (current GBPUSD rate is 1.2911) vs Gold price $1195! That's a difference, do they update prices at all, or is it normal? Also, what's the risk associated with buying unleveraged Gold ETFs?

Hi BB, take a look down the list as I asked the same question before (we must be thinking along similar lines), title is `gold in all its forms`.

[kibuc]

8 hours ago, BearyBear said:

I had a look at https://www.royalmintbullion.com/Products/Britannia/Gold/BB18CBGC and their current price is £998.66 which is $1288.27 (current GBPUSD rate is 1.2911) vs Gold price $1195! That's a difference, do they update prices at all, or is it normal? Also, what's the risk associated with buying unleveraged Gold ETFs?

Looks pretty normal to me, keep in mind that coins carry increased production costs and are probably in higher demand due to being CGT free.
 

You'll get closer to the spot price by buying in bulk (only £980 per coin if you buy 500+, yeeey!) or by buying bars. This single 1oz bar can be had for £970, so a full 3% lower or as low as £959 if you buy 100+ (I know, I know...). You're giving up your CGT benefit, though.
https://www.royalmintbullion.com/Products/Bars/RMGM1OZ

 

Want to get an even better bargain? Buy a 400oz Good Delivery bar for just £939 per ounce
https://www.royalmintbullion.com/Products/Bars/RMGM400G

[Barnsey]

@DurhamBorn, you wouldn't happen to actually be world famous 83 year old economist Harald Malmgren would you?

[MrXxx]

Quick question...just as investors should adjust their % of stocks to bonds as they get closer to retirement, do any of you do this in regards to the economic cycle I.e with the coming crash will you be buying a higher % of bonds, and if so what %?

[DurhamBorn]

32 minutes ago, MrXxx said:

Quick question...just as investors should adjust their % of stocks to bonds as they get closer to retirement, do any of you do this in regards to the economic cycle I.e with the coming crash will you be buying a higher % of bonds, and if so what %?

I havent bought bonds for a long time.The last ones i bought were in 1996 and were direct bonds in Glaxowellcome at 8.8% yield and BT at 7.9% yield.Hargreaves used to often market bonds like that to clients.The only bonds id consider now and buy now are US treasuries.There should be a short,but nice performance in them as the debt deflation hits.However i see bonds as being a terrible investment in the next cycle as inflation cranks higher.Im usually pretty much fully invested in dividend paying shares,im just a contrarian and tend to focus my portfolio on where my macro road map points and the hated sectors.The thing iv learned from decades of investing is that usually the sectors that the next cycle will help,are the ones that are hated at the end of the present cycle.People nearly always mistake companies and sectors as being bad investments/bad companies,when really its just the cycle thats against them.

 

 

[DurhamBorn]

11 hours ago, Barnsey said:

@DurhamBorn, you wouldn't happen to actually be world famous 83 year old economist Harald Malmgren would you?

Ha no,but i think thats the road map we have ahead,its almost certain.The good thing is inflation cycles are the best cycles to make a lot of money,but its only a few sectors that manage to leverage that inflation.Yesterday gold had a reading of 5% in the monthly sentiment index.The lowest EVER.To have a reading that low is incredible.The weekly sentiment on the GDX hit 4.97% again incredible numbers.The last time these numbers where even close saw 300% increases in the miners over the following period.These sort of indicators have always pointed to a very strong trend reversal in the past.We will know within a year if they have this time as well.

[A_P]

57 minutes ago, MrXxx said:

Quick question...just as investors should adjust their % of stocks to bonds as they get closer to retirement, do any of you do this in regards to the economic cycle I.e with the coming crash will you be buying a higher % of bonds, and if so what %?

If we are in a period of rising interest rates then wouldn't bond prices decrease? Bonds have been in quite the bull run for a while. Currently any bond allocation I probably should have for my risk appetitite I have in cash in various accounts and currencies. I prefer the liquidity than the marginal % gain on holding bonds

[A_P]

Anyone that owns GDX and GDXJ can you confirm if the total costs (including underlying transaction costs) total 0.86% and 2.13% respectively rather than the advertised 0.53% and 0.55%

[sancho panza]

On 22/08/2018 at 21:52, Majorpain said:

This is what i imagine 2001 looked like at the time, buy Tech and youll be rich!  

 

Made me look at a long term HUI chart.

Oct 2000 Bottom $36,

Mar 08 peak $514

Oct 08 bottom $168

Sep 11 peak $628

Aug/Sep/Oct/Nov 15 bottom $107 (clearly a significant level for some reason)

 

On 23/08/2018 at 00:36, DurhamBorn said:

One good thing about shorting Amazon is that at least you wont get caught out by a takeover offer.I dont like leveraged products though as the costs slowly chip away at your capital and i dont really want to lock up capital shorting it without leverage.

Borrowing costs and dividend costs can be substantial.For me,you have to have a clear and set budget and a plan with a valid/realistic timescale or you will get mullered. Hence,I generally only short after what I believe are market peaks (although using options as a trading hedge is sensible and not what I would term actual shorting).

 

What constitutes a market peak is a matter of debate in terms of whether you use index peaks (which can mask substantial internal market weakness) or another mechanism such as 'shoeshine' moments.

7 hours ago, MrXxx said:

Quick question...just as investors should adjust their % of stocks to bonds as they get closer to retirement, do any of you do this in regards to the economic cycle I.e with the coming crash will you be buying a higher % of bonds, and if so what %?

As per DB answer,I've never held bonds.You can use utility companies as a proxy within sensible parameters which give an inflation hedge.Much as I like the shape and look of Vodafone,I wouldn't buy it's 2% bonds.At 20% maybe.

[sancho panza]

Deflation cometh..........................I catch the gist of it.

Hattip Moneyweek

https://www.ft.com/content/5a359796-a18e-11e8-85da-eeb7a9ce36e4

Global equity market shrinking at fastest pace in 2 decades

US companies buying back $1tn a record

UK/Europe/Japanese companies buying back own stocks aggressively -$248 bn (double last year)

At the same times as new issuance is shrinking,such that equity issuance/buybacks is at a 22 year record low.

[sancho panza]

https://moneymaven.io/mishtalk/economics/italy-capital-flight-escalates-highest-two-month-total-ever-QmWX019fhUSanqPLLN7RbQ/

Capital Flight in Italy escalates at a record pace. It's seen in Target2 balances and spreads rather than an EM crisis.

Theory vs. Reality

In theory, there is zero default risk on Eurozone sovereign bonds.

If that was the case, German 10-year bonds and Italian 10-year bonds would have the same yield.

In practice, the bond market says the spread between German and Italian 10-year bonds is 275.5 basis points (2.755 percentage points) and climbing.

For now, capital flight shows up in interest rates, spreads, and Target2 balances rather than a full blown crisis of some sort. How long this can continue is anyone's guess.

Bottom Line

Claims that none of this matters and that there would be no consequences if Italy left the Eurozone and defaulted are more ridiculous as ever.

The harder people attempt to come up with reasons that none of this matters, the sillier they look.

The bond market is talking. Who's listening?

Mike "Mish" Shedlock

[sancho panza]

More spamming of Mish

https://moneymaven.io/mishtalk/economics/large-specs-net-short-gold-first-time-since-2001-buckle-up-MzuScGdtdUa4HUcDMk_1NA/

[sancho panza]

https://moneymaven.io/mishtalk/economics/after-slim-profits-or-losses-in-many-quarters-amazon-is-the-single-biggest-driving-force-behind-A_ftQDsRp0KDaWTJrrzKtQ/

'This is the second most overvalued market in history according to the Shiller P/E Ratio.

Obviously this is not a timing mechanism but it is a monster big warning symbol.

 

[BearyBear]

Gold and Silver went mad after publishing this:

https://www.federalreserve.gov/newsevents/speech/powell20180824a.htm

 

[sancho panza]

If you have the time,Hussman 'Extrapolating Growth' article embedded in the Mish link is a long but superb read

https://moneymaven.io/mishtalk/economics/the-bulls-are-cheering-loudly-today-as-the-s-p-hits-record-equals-longest-bull-run-https-www-TKAm_YK2pE6kHUBTyxFhkw/

'Record Breaking Bear Coming

Following the record breaking bull market we can expect a record breaking bear market.

GMO predicts returns of -2.3% to -4.9% per year for seven years.

John Hussman is even more bearish as noted most recently in Extrapolating Growth.

[DurhamBorn]

6 minutes ago, BearyBear said:

Gold and Silver went mad after publishing this:

https://www.federalreserve.gov/newsevents/speech/powell20180824a.htm

 

As earlier in the thread,my indicators were all flashing massive buy for gold and the miners,the only indicator saying sell was my ALGO indicator,this one tracks momentum and chasers of trend.The fact all my other indicators say massive buy (some signals the best in 45 years) and the ALGO says sell says to me the down selling was from leveraged shorts on the COMEX.They will likely be burned badly.

[DurhamBorn]

31 minutes ago, sancho panza said:

https://moneymaven.io/mishtalk/economics/after-slim-profits-or-losses-in-many-quarters-amazon-is-the-single-biggest-driving-force-behind-A_ftQDsRp0KDaWTJrrzKtQ/

'This is the second most overvalued market in history according to the Shiller P/E Ratio.

Obviously this is not a timing mechanism but it is a monster big warning symbol.

 

Love the overweight graph in the article.As a contrarian its great to see that the areas they have the smallest holdings are the very areas i like going forward including utilities and telecoms.

[sancho panza]

3 minutes ago, BearyBear said:

Gold and Silver went mad after publishing this:

https://www.federalreserve.gov/newsevents/speech/powell20180824a.htm

 

Thanks for that.Incredible read..................

As discussed before Powell was a left field pick and he really is turning on the orthodox monetary policy of the last 50 years.

Interesting that Powell diverges from the neo Classical herd with the following:highlights are mine(the full piece is well worth a read.

'In keeping with the spirit of this year's symposium topic--the changing structures of the economy--I would also note briefly that the U.S. economy faces a number of longer-term structural challenges that are mostly beyond the reach of monetary policy. For example, real wages, particularly for medium- and low-income workers, have grown quite slowly in recent decades. Economic mobility in the United States has declined and is now lower than in most other advanced economies

It is now clear that the FOMC had placed too much emphasis on its imprecise estimates of u* (natural rate of unemployment) and too little emphasis on evidence of rising inflation expectations.

Experience has revealed two realities about the relation between inflation and unemployment, and these bear directly on the two questions I started with. First, the stars are sometimes far from where we perceive them to be. In particular, we now know that the level of the unemployment rate relative to our real-time estimate of u* will sometimes be a misleading indicator of the state of the economy or of future inflation. Second, the reverse also seems to be true: Inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization. Part of the reason inflation sends a weaker signal is undoubtedly the achievement of anchored inflation expectations and the related flattening of the Phillips curve.¹⁴ Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.

[Dogtania]

Back on topic :). I've finally found a good Tesco for big reductions that since yesterday is hopefully going to be a mainstay.  Mainly it's stuff I'll eat within the day like gorgeous watermelon chunks 80% reduced and snacks for work like sushi 75% off and orzo salad etc.  My second day popping in at about 5.30 there was less in the chilled but more in the fresh fruit, thinking now it's about 5.15 when they do some of the big reductions.  I would have thought that's quite early but could be the location being a factor or near office park.  

Anyway as soon as I arrived there is a pop up table at the door with various longer life stuff as well as bakery crated behind.  All big 80% off type affair.  Then at the other end of the large store there is a section with various reduced things I think permanently set up.  Picked up for example a nice £1.80 can of soup for 45p, still got until 2021 to eat.  

Apart from my bottle of Trappist beer everything at checkout was golden yellow stickered... Now considering buying the prepaid card that gives 4% off Tesco which I do for other shops ranging from 5-8% off.  My own personal deflation story

[Lightscribe]

16 minutes ago, Dogtania said:

Back on topic :). I've finally found a good Tesco for big reductions that since yesterday is hopefully going to be a mainstay.  Mainly it's stuff I'll eat within the day like gorgeous watermelon chunks 80% reduced and snacks for work like sushi 75% off and orzo salad etc.  My second day popping in at about 5.30 there was less in the chilled but more in the fresh fruit, thinking now it's about 5.15 when they do some of the big reductions.  I would have thought that's quite early but could be the location being a factor or near office park.  

Anyway as soon as I arrived there is a pop up table at the door with various longer life stuff as well as bakery crated behind.  All big 80% off type affair.  Then at the other end of the large store there is a section with various reduced things I think permanently set up.  Picked up for example a nice £1.80 can of soup for 45p, still got until 2021 to eat.  

Apart from my bottle of Trappist beer everything at checkout was golden yellow stickered... Now considering buying the prepaid card that gives 4% off Tesco which I do for other shops ranging from 5-8% off.  My own personal deflation story

If Tesco is going to be your ‘bag’ then obviously don’t forget your clubcard. The till will usually chug you out some offers for further discounts and money off fuel etc. Worth picking up the free magazine too for coupons. Another tip is that tesco debit card used as your clubcard will ensure you get ‘full’ points at the petrol station too.

The scheme has devalued over the years, but I have done well out of it for air miles (combined with Amex we fly business on points each year) and a Rolex DateJust II (I kid not) with a x3 boost at Goldsmiths jewellers. I mainly got my points buying and selling UCS and end of production Lego sets from Tesco online. I think I’ve cost them quite a bit of money over the years.

[MrXxx]

DB,SP, AP, thanks for  your thoughts...OK, that makes sense if you had a trading account, but what if it was a pension plan?...I was thinking along the lines of Bonds (read Gilts really) are almost guaranteed secure whilst giving a better return than cash, so if you were currently invested in mainly stocks would it not make sense in the short term to make the move to bonds to avoid the stock crash and then move back into stocks (or a higher %) just after the crash event?

[DurhamBorn]

1 hour ago, MrXxx said:

DB,SP, AP, thanks for  your thoughts...OK, that makes sense if you had a trading account, but what if it was a pension plan?...I was thinking along the lines of Bonds (read Gilts really) are almost guaranteed secure whilst giving a better return than cash, so if you were currently invested in mainly stocks would it not make sense in the short term to make the move to bonds to avoid the stock crash and then move back into stocks (or a higher %) just after the crash event?

Its a very difficult thing to answer but im with @sancho panza in that i prefer utility shares etc than UK gilts.Id take my chance on 8% dividends outperforming any share falls over 5 years.I also consider cash at this point a good investment.I bought a lot of US treasuries quite a while ago but have taken some profits (about 40% sold).Iv actually got a small pension i cant transfer as its connected to a final salary part as well (the salary went into final salary but the shift element went into money purchase) and its for about £20k in the money purchase side.That whole £20k is now sat in the cash fund.