This page has been archived and commenting is disabled.

The Global Leverage Cycle: You Are Here

Tyler Durden's picture




 

While one can make an argument that the central banks have now destroyed all traditional "cycles", including the economic "virtuous cycle", the business cycle and even the leverage cycle, the question remains how much longer can the Fed et al defy mean reversion and all laws of nature associated with it. That said, assuming the fake market environment we find ourselves in persists for at least another year, this is what the leverage cycle would look like assuming $10 trillion in global central bank assets were a pro forma new normal.

Keep a close eye on China: it is on the cusp between the end of the leverage cycle (where as we reported over the past two days, it has been pumping bank assets at the ridiculous pace of $3.5 trillion per year) and on the verge of having its debt bubble bursting. What happens then is unclear.

Some thoughts on the above graphic from SocGen:

For the first time post-crisis, we expect advanced economies in 2014 to see a marked increase in their contribution to global growth. Emerging economies have over the past few years offered a welcome support to global growth, but this relied in part on a build-up of credit that now needs to be paid down. The hope is for advanced economies to take over the baton from the emerging economies as the main driver of global growth. The US is now poised for sustainable  recovery and in Japan hopes remain that Abenomics will work. The euro area, however, continues to lag. As such the growth relay from emerging to advanced is likely to prove a bumpy process. Commodity markets will sit at the heart of this dynamic – our strategists look for range-bound markets in 2014.

This new rotation of the global leverage cycle is an integral part of our monetary policy outlook, which we discuss in greater detail in the following sections. Several features are worth noting:

Time for emerging economies to deleverage: Post crisis, emerging economies adopted accommodative economic policies to offset the collapse in demand for their output. Providing a further boost, accommodative monetary policies in advanced economies drove significant financial flows into the region. Combined, these fuelled credit expansion. With the turn in the US interest rate cycle back in the spring, external financing conditions tightened. Moreover, in a number of emerging economies, policymakers have become increasingly concerned by a build-up in leverage; this is not just a story of level, but also one of speed. As seen from our leverage cycle, we believe the emerging economies have now moved to a phase of deleveraging. Our emerging market theme, however, is not just one of a cyclical downturn. As we have highlighted on several occasions, we believe potential growth is structurally slowing and no more so than in China.

China must tame excess capacity: With NFC debt at over 150% of GDP and significant excess capacity, China is ripe for deleveraging. Already in 2013, a notable feature of our forecast has been that the Chinese authorities would resist market pressure to ease monetary policy and further fuel the credit bubble. Nonetheless, shadow bank credit has continued to expand and, with that, problems of excess capacity. China’s challenge now is to deleverage and reform. The two in many ways go hand in hand and we discuss these issues in Boxes 5 and 14. It is worth nothing here that reform in China is tantamount to removing  the 100% implicit state guarantee. And looking ahead, even state-backed companies could be allowed to fail. Herein resides also a potential trigger for the risk scenario of a hard landing, should such a company failure be poorly managed and spin out of control.

Japan’s corporate sector to cut savings to invest: Investment and savings are two sides of the same coin and to secure sustainable recovery in Japan, corporations need to reduce savings and invest. The BoJ’s monetary policy is already working through the currency channel and our expectation is to see a pick-up in corporate investment next. This is not just a function of monetary policy, but also the two remaining arrows of Abenomics, namely fiscal stimulus and structural reform. We see significant opportunities medium-term from reform as discussed in Box 13. Short-term, the BoJ is poised to deliver further  stimulus and we look for additional asset purchases to be announced early in the new fiscal year (commencing April 1).

US credit cycle is turning: Credit channels have been repaired, household balance sheets deleveraged and excess housing stock unwound. Combined, these lay the foundations for sustainable recovery. In 2013, fiscal tightening exerted a headwind to growth, but this is now easing allowing GDP growth to accelerate to 2.9% in 2014. For the Fed, setting the right monetary policy during this transition will be challenging. A glance at our leverage cycle suggests that the challenge as recovery gains traction over time is to avoid a build-up of excess leverage. This is not an immediate concern to our minds. Although we forecast household credit expansion, our forecast for household income growth is higher, entailing some further reduction of the household debt-to-income ratio.

UK housing credit has been boosted by government measures: Supported by policy initiatives, UK housing is staging a recovery. This is highly dependent on mortgage loan conditions and the BoE will be keen to keep rates low. We expect the Bank to lower the unemployment rate threshold on its forward guidance from 7.0% to 6.5% (and reduce the NAIRU from 6.5% to 6.0%). The hope medium-term, is that this housing-driven recovery will eventually become broader based with stronger confidence, consumption, exports, corporate investment and lower unemployment. Much will depend, however, on euro  area recovery as of 2015. Longer-term, a possible UK referendum on EU membership remains a point of uncertainty.

Euro area still facing headwinds: Individual euro area economies are in very different stages on the leverage cycle. Germany is the most advanced, followed by France, Italy and Spain. For several euro area economies, financial fragmentation and fiscal austerity remain serious headwinds. 2014 will see the arrival of a Single Supervisory Mechanism. As we discuss in Box 10, progress on a Single Supervisory Mechanism continues to disappoint and our base line remains for only a gradual repair of credit channels. Moreover, structural reforms are also not progressing at the desired pace, albeit with significant variation from country to country. The danger for the euro area is to become trapped in a lost decade of very low growth and low inflation. The ECB still has options. The real game changer opportunities, however, reside with governments to deliver quantum leaps on reform – at both the euro area and national levels. For now, progress remains disappointingly slow.

Summing up our view, 2014 will thus be the first year post crisis when advanced economies make an increased contribution to global GDP growth.

* * *

Good luck

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 11/27/2013 - 13:37 | 4194094 HedgeAccordingly
HedgeAccordingly's picture

And Icahn is right about .......................Here http://hedge.ly/I8fi19

Thu, 11/28/2013 - 04:22 | 4196253 fx
fx's picture

when all is set and done, icahn will have made big $$ in HLF on the way up, and Ackman will have made big $$ on the way down. Almost everybody else (long or short) will have paid for that. end of story.

Wed, 11/27/2013 - 13:39 | 4194097 centerline
centerline's picture

Now that's some funny stuff.

Wed, 11/27/2013 - 13:52 | 4194125 aVileRat
aVileRat's picture

Stopped reading when they said the UK housing recovered, the US conduits were repaired and they are bullish on Japan.

Would have had a better shot if they had went the 'fundamentals are cheap' angle.

Wed, 11/27/2013 - 14:07 | 4194163 Herd Redirectio...
Herd Redirection Committee's picture

USA in 'No Bubble' territory...  nice.

Wed, 11/27/2013 - 14:45 | 4194258 Againstthelie
Againstthelie's picture

These banksters are absolutely shameless.

Central banks pouring 120 bn$ per MONTH (US + JP) into the stock market and they have the CHUZPAH to write such a piece of paper shit.

Wed, 11/27/2013 - 15:33 | 4194424 W74
W74's picture

+1 for Chuzpah.  Have a happy KikesTaking day tomorrow.

Wed, 11/27/2013 - 16:38 | 4194721 N2OJoe
N2OJoe's picture

Who thinks up crap like this? Author is a moron.

Wed, 11/27/2013 - 14:33 | 4194215 The Heart
The Heart's picture

Talk about funny.

Here's a joke for ya.

Anyone stupid enough to sign up for this commi-scam-care, deserves all it will do to them for the rest of their life.:

http://www.youtube.com/watch?v=AR7mngELoWI

Wed, 11/27/2013 - 14:46 | 4194257 TheGardener
TheGardener's picture

This ain't no guest post, Tylers need no sarc tag on their
own site, you have been had.. :-))

Wed, 11/27/2013 - 13:42 | 4194108 I am Jobe
I am Jobe's picture

i spilled my drink- WTF, yeah sure. Did Edward Bernay's come back alive?

Wed, 11/27/2013 - 13:41 | 4194109 observer007
observer007's picture

Bitcoin EXPLOSION:

BITCOIN almost $ 1100

Realtime quotes:

http://btcpost.net/index.php

Wed, 11/27/2013 - 14:13 | 4194176 Skateboarder
Skateboarder's picture

That's more than two weeks of pay after taxes for a minimum wager.

Wed, 11/27/2013 - 15:32 | 4194418 W74
W74's picture

Probably closer to three weeks.

Wed, 11/27/2013 - 16:24 | 4194648 QQQBall
QQQBall's picture

Prolly closer to monthly net. 

Wed, 11/27/2013 - 13:51 | 4194126 jim249
jim249's picture

All rainbows and unicrons. All is well again!

Wed, 11/27/2013 - 13:54 | 4194130 I am Jobe
I am Jobe's picture

i Love skittles- Does that count?

Wed, 11/27/2013 - 13:54 | 4194131 Toolshed
Toolshed's picture

"US credit cycle is turning: Credit channels have been repaired, household balance sheets deleveraged and excess housing stock unwound."

ROFLOL!!!!!!

Wed, 11/27/2013 - 13:55 | 4194134 Moe Hamhead
Moe Hamhead's picture

Bitcoin--- the "new" tulips !

Wed, 11/27/2013 - 14:08 | 4194165 lolmao500
lolmao500's picture

From ZH twitter :

U.S. AIR CARRIERS BEING ADVISED TO TAKE STEPS TO OPERATE SAFELY OVER EAST CHINA SEA

How the hell are they supposed to do that? Install flares on airliners? Or is this the government telling them to COMPLY with China annexing parts of Japanese territory?

Wed, 11/27/2013 - 14:52 | 4194277 TheGardener
TheGardener's picture

Safely is responding to calls and setting your transponder according to instructions given . Means they are back pedaling full course.

Wed, 11/27/2013 - 14:54 | 4194285 SunRise
SunRise's picture

They do it by requiring all passengers to obtain Obamasnare before boarding their flight.  That's why the B52's were empty.

Wed, 11/27/2013 - 14:25 | 4194195 AngelEyes00
AngelEyes00's picture

Wow, SocGen sure can mix a mean batch of Koolaid!

Wed, 11/27/2013 - 14:37 | 4194227 centerline
centerline's picture

lol.  Needs to share the recipe.

Wed, 11/27/2013 - 14:45 | 4194259 ChaosEquilibrium
ChaosEquilibrium's picture

That my fellow ZH'ers......Is the 'analysis'(ie. BULLSHIT) of a VERY VERY DESPERATE BANK!!!!!

 

The levered and INSOLVENT International Banks.....will lie, manipulate, rationalize ALL THE WAY TO ZERO!!!

Prepare to see this shit for analysis- authored by Banks, Central Banks, Governments, and Media EVERY DAY in the coming weeks and months!

 

This story of 2008(as ZH understands) is NOT a story of cyclical recession---IT IS the HISTORY of the COLLAPSE of "Western 'free-market' Capitalism and Democracy"...that is why THE LIE OF ALL LIES---THE GREATEST STORY EVER TOLD.....will be spun,repeated, recycled, manipulated until THE END!!

The LAWS of Human Nature, Rational Reason, Risk, and Econometrics CANNOT be changed in 5 years.....It would require a re-wiring of the human mind, Physical Force, 'Re-evaluation of "Value" and fundamental changes to the laws of Mathematics

 

Prepare accordingly!

Wed, 11/27/2013 - 15:11 | 4194306 ZerOhead
ZerOhead's picture

"The LAWS of Human Nature, Rational Reason, Risk, and Econometrics CANNOT be changed in 5 years"

 

Heck... they didn't even try to change the laws. It might have had the undesirable effect of reducing cash inflows to our hallowed politicians and their "very special interest" crooks.

As for the time of the collapse being 2008... yup... that's what the toe tag on this cadaver should read. Since then it's been all-out Zombinomics 101...

Wed, 11/27/2013 - 14:56 | 4194292 disabledvet
disabledvet's picture

so history doesn't lie...the announcement is November 25th and beginning of QE 1 is in December, 2008. http://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_ac... ooops, sorry...that link is for Volker and raising rates to 12 percent after "taking charge." (interest rates were already at 11% then.) wow...imagine those days. So the purchases were for Agency debt...literally a bailout of Fannie and Fred. "Mark to model" returned in March, 2009...which "marked" the end of the panic basically. those were the "Larry Kudlow V shaped recovery days" (followed by prolonged periods of silence.) Wall Street was more than a little wobbly in those days...but this was then followed by the Greek debt crisis http://en.wikipedia.org/wiki/Greek_government-debt_crisis which was then followed by QE 2 which was an outright open ended purchase of treasuries not the MBS's of Fannie and Fred. Europe at this point completely imploded and then you had Fukushima http://en.wikipedia.org/wiki/Fukushima_Daiichi_nuclear_disaster (11 march 2011). This (ongoing) catastrophic event caused the only correction in equities that i am aware of since 2009. This brought upon Operation Twist...which create an EPIC demand for long dated treasury bills and mortgage backed securities. Interest rates in the USA plunged to lows never before seen in US history...and a "jobless prosperity" ensued. (h/t David Rosenberg/Tom Keene.) Europe then began its "LTRO" operations http://www.bloomberg.com/news/2012-08-02/draghi-says-ecb-may-start-outri... this caused interest rates to plunge in the EZ...equities to surge and the Fed to "follow" by announcing continuing with QE. Great Britain i believe ramped up their own QE at this time...even though they had been "doing it" since March of 2009 as well http://www.bbc.co.uk/news/business-24614016 as the Fed followed the the market higher and ever other Central Bank followed the Fed (Japan being the latest) equities have gone parabolic literally swimming in an Ocean of liquidity. the commodity complex with gold and silver in particular had enormous double tops and then this summer and without warning the Fed announced "taper." this caused a total annihilation of the commodity complex...although land prices have held up reasonably well in London and in the USA. (do they have land in London? hehehehehe.) "Taper" was quickly reversed and in my opinion you have an epic wind down of "Federal Government operations" well underway...but that's just my view and a textbook deflation is now emerging inside Europe...particularly in the periphery but now spreading methinks to the "center" itself. Krugman should love Japan as they look to be stuck in a stagflation...or worse. the USA is ramping up energy production to levels not seen in decades...is now a net energy exporter for the first time since just after World War II (the "guarantee of inflation cudgel" created by Wall Street as part of Plan Victory)...so needless to say you're not going to get any inflation from that source. (natural gas prices collapsed actually.) And now you have what appears to be a combination of a technological upgrade cycle and an industrial revolution 3.0. You'll still have an Army, Navy, Air Force and Marine Corps. they won't have a lot of personnel though. all i have to say is "good luck with the recovery thesis" as far as pricing goes. http://www.arkansasbusiness.com/article/94789/big-river-steel-mill-linin...

Wed, 11/27/2013 - 15:22 | 4194370 malek
malek's picture

Hilarious.

France: almost finished deleveraging.

Australia and Canada: no bubble!

Wed, 11/27/2013 - 15:57 | 4194544 Dadburnitpa
Dadburnitpa's picture

Was this graphic put together by a chimp?

Wed, 11/27/2013 - 19:08 | 4195194 Jimbobo
Jimbobo's picture

NUTS!

Wed, 11/27/2013 - 20:32 | 4195422 jonjon831983
jonjon831983's picture

"US credit cycle is turning: Credit channels have been repaired, household balance sheets deleveraged and excess housing stock unwound. Combined, these lay the foundations for sustainable recovery. In 2013, fiscal tightening exerted a headwind to growth, but this is now easing allowing GDP growth to accelerate to 2.9% in 2014. For the Fed, setting the right monetary policy during this transition will be challenging. A glance at our leverage cycle suggests that the challenge as recovery gains traction over time is to avoid a build-up of excess leverage. This is not an immediate concern to our minds. Although we forecast household credit expansion, our forecast for household income growth is higher, entailing some further reduction of the household debt-to-income ratio."

 

What about this?

"Insight: A new wave of U.S. mortgage trouble threatens" (HELOCs - 10 yrs)

http://www.reuters.com/article/2013/11/26/us-usa-mortgages-homeequity-in...

Thu, 11/28/2013 - 02:30 | 4196192 thestarl
thestarl's picture

Total BS, this moron obviously does'nt live on main street. 

 

 

Do NOT follow this link or you will be banned from the site!