Credit Conditions

During “normal times” – an economic growth phase accompanied or generated by rising systemic leverage – central banks have incentive to promote nominal growth and inflation, which make banking systems profitable and their free-spending political overseers happy. In such times, commercial banks have fiduciary responsibilities to shareholders to constantly increase their market values, which they do by expanding their balance sheets.  Now that economies are highly leveraged, extinguishing debt would require banks to reduce the sizes of their loan books, which would shrink their market values. Thus, it seems economic policy makers never have incentive to promote debt extinguishment in the banking system, regardless of economic conditions or prospects.

The Man in the Moon studies the pathology of Earth’s global economy and markets from a distance where there’s no gravitational pull towards empiricism or consensus. His findings: 1) the global economy is over-leveraged, fragile, stagnating, and increasingly centrally managed; 2) capital markets and asset performance have been captured by the perception of the ongoing value of money, and so; 3) unconventional investment analysis is prudent.

Despite the government's 'advice' to young debt-laden students, the tragedy of the American farmer continues with worryingly pessimistic views on the future of the industry. With farmland prices falling for the first time in almost 30 years, credit conditions are weakening dramatically and the Kansas City Fed warns that persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity, and JPMorgan concludes, the industry is currently in dire straits with the potential for a liquidity crunch for farmers into 2016.

It appears The US Ministry of Truth has been hard at work this week...

The biggest overnight story was neither out of China, where despite the ridiculous surge in new account openings and margin debt the SHCOMP dipped 08%, or out of Japan, where the Nikkei dropped 2.7%, the biggest drop in months, after the BOJ disappointed some by not monetizing more than 100% of net issuance and keeping QE unchanged, but Europe where for the second day in a row there was a furious selloff of Bunds at the open of trading, which briefly sent the yield on the 10Y to 0.38% (it was 0.6% two weeks ago), in turn sending the EURUSD soaring by almost 200 pips to a two month high of 1.1250, and weighing on US equity futures, before retracing some of the losses.

The entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more debt into the system. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is starting to happen once again.

"...the deterioration in both economic data and profitability data leave a good bit of cause for near-term concern..."

And the answer is...

Four and a half years after Brazil's FinMin Guido Mantega first re-introduced the world to the term "currency wars," it appears the Brazilians have admitted defeat. Amid what Goldman calls a sharp decline in consumer confidence - to the lowest level in series history - which could also extend the ongoing macroeconomic adjustment processes and therefore delay the recovery of the economy; Brazil's central bank has announced that it will no longer intervene to support the Real via its Dollar-Swap program. In a SNB2.0-esque move, though somewhat anticipated by the market, Brazil enables the devaluation that has occurred to perhaps extend (improving competitiveness) and removing what was becoming a notable fiscal drag. Implicitly, Brazil just followed the Swiss and admitted defeat in the global currency war...

*FISCHER SAYS RATE LIFTOFF LIKELY WARRANTED BEFORE END-2015

With the world now convinmced that Janet Yellen is as dovish as she has ever been on rate hikes, today comes the first post-FOMC speech. None other than Vice-chair Stanley Fischer is due to address The Economic Club of New York on the topic of "Monetary-policy lessons and the way ahead." As Art Cashin warned this morning, Fischer "seems to feel that the Fed must raise rates this year. He is also the only Fed official to concede that any rate hike will be different than any seen before."

To truly understand what The Fed does, we go to the source... "The Fed is best known for its influence in money and credit conditions in the economy in order to help the US economy experience strong growth in output and income, high employment, and stable prices." So factory output growth is now negative, income stagnant, the percentage of employed people in the population is catastrophic, and prices (oil collapse? stock explosion? record beef and beer prices?) are anything but stable.

Despite a modest 1.7% rise (after dropping 1.5% in December), Pending Home Sales missed expectations of a 2.0% rise - the 5th monthly miss in a row. It appears NAR's chief economist Lawrence Yun has flip-flopped: On existing home sales, NAR blames drop on lack of supply (as prices drop); on pending home sales, NAR says buyers overcame lack of supply.

It appears all the emerging/emerged economies of the world that are supposed to be the dynamic growth engines to lead the world to escape velocity are, well, not. Perhaps no better example is Brazil where hyper-growth expectations have disappeared into a black hole as business and consumer confidence collapsed this week to historical lows. As Goldman noted, "This poses major headwinds for private consumption and overall activity in the coming months."

Are we on the verge of a major worldwide economic downturn? Well, if recent warnings from prominent bankers all over the world are to be believed, that may be precisely what we are facing in the months ahead.

But the shadow of crisis has passed... it appears the engine of job growth in America is sputtering as NFIB Small Business optimism dropped from 100.4 to 97.9 (against an extrapolated 101.0 expectation - the biggest miss since Nov 2012). Across the board the data was disappointing with the percentage of firms expecting a better economy falling to 0%, and the number of employers anticipating job creation drops to just 14%.