How could credit circumstances be worse than 2008? Did we not learn from our mistakes? Was the system not fixed? Apparently not according to this former BIS, Bank of International Settlements veteran, things are 30% worse than they were back then. This is perhaps the most authoritative voice in the international markets, as prior to the 2008 meltdown it had forewarned of the need for policy-changes when all the rest were basking in the euphoria of those times. No one listened.
We too also began shifting client assets to cash and contrary assets classes back in August, 2007. Our analysis and conclusions, documented in our 2007 "Eye of the Storm" presentation to clients, presented troubling credit markets calling for, in our last analysis, "The Mother of All Credit Crunches." And that is exactly what occurred a bit more than a year after our report was filed with clients. So here we are again!
The chart at the bottom shows a frightening 45% increase in leveraged loans with weaker borrowers - and this rush to riskier credits should not be unexpected given the high profile sovereign credit problems throughout Europe over the past year. And add to it growing concerns about China's credit bubble,making lenders desperate for ways to make a buck.
Where can lenders go? Certainly not Japan as its economic and credit system have been teetering for nearly two decades. The US? Look at this Federal Reserve chart below and it is apparent that the US economy has been financed by a major credit expansion since 2008.
The world's top three economies are facing problematic symptoms associated with excessive credit expansion. The picture grows dimmer when the EU's recent troubles in Cyprus, Spain and Portugal are considered Even Canada is looking dicey, as its Banks' liberal lending practises have sparked an overheated Condo boom, in the Toronto market. Many emerging nations are also experiencing the pains of the boom and bust credit cycle.
All this is putting tremendous pressure on long rates that Central Bankers are trying to talk down with rhetoric. Don't expect investors to buy into their sales pitches for much longer. The Fed, meanwhile, should continue with its tapering program for some time to keep US domestic rates in check, but that may not be much help for Europe, China. Japan, Canada and emerging markets. If rates do climb sharply elsewhere, no amount of Humpty-Dumpty tapering may be able to keep these financial flood waters from hitting US shores. Overbought equity markets could get trashed while gold bugs are redeemed for the time being, as markets seek safety.
Around the world we are seeing marginalized countries collapse under financial pressures caused by real physical issues associated with constraints of their populations over shooting the physical resource base of the country. Exponential mathematics then playing a hand in exacerbating their demise. Social and political unrest continues to grow and populate the international headlines. These troubles ultimately find their way back to developed nations as the deep global interconnections cannot be avoided - there is nowhere to run, nowhere to hide.
We have long said that classical economic theory is facing a day of reckoning with existential economic science; that the story of the theory's positive sum game contradicts existential science's negative sum game reality. Their collision will bring about a rock-bottom crash of unprecedented proportions to an abstract system . The fact that even Stephen Hawking included economic concerns, on his committee's end-game agenda, corroborates our position. More people see the writing on the wall.
From the above, we can only conclude that when the day of reckoning between classical and existential economics comes, its effects will be deep and widespread, globally. And again, there will be nowhere to run - and nowhere to hide.
First Financial Insights
September 19, 2013