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MOST CRITICAL TIPPING POINT ARTICLES TODAY

 

   

 

FLOWS - FLOWS

09-22-15

THEME

US Flow of Funds: Net Equity Issuance Yardeni

US Flow of Funds: Net Equity Issuance (excerpt)


The Fed released its Q2 Flow of Funds (FOF) report on Friday. There's always plenty of interesting developments that are chronicled by this voluminous data dump. I was particularly struck by the data on net equity issuance by US nonfinancial corporations, US financial corporations, and foreign issuers. On balance, the data somewhat diminish the bullish share buyback story that I have been telling since early on during the current bull market. Consider the following:

(1) Three players. Corporate buybacks along with M&A activity have most noticeably reduced the supply of shares issued by nonfinancial corporations in the FOF tally. Over the past four quarters, their net equity issuance was minus $490 billion. This is the most negative this series has been since Q2-2008, and it has been in negative territory since the mid-1990s.

On the other hand, US financial corporations had net equity issuance of $250 billion over the past year. This series has been in positive territory since the beginning of the previous decade. There’s been a significant increase in net equity issuance by foreign corporations, which rose to a record $549 billion over the past four quarters.

(2) Grand total. The sum of these three series adds up to $309 billion over the past four quarters. While the S&P 500 data show that buybacks have been increasing throughout the current bull market, the FOF data on total net equity issuance was positive during 2009 and 2010, when financials had to raise lots of capital. Then it turned negative during 2011 and 2012 as financials significantly reduced their issuance. Since 2013, it has been increasingly positive as foreign equity issuers raised record sums in the US stock market.

How subprime loans keep the bubble going MyBudget

How subprime loans keep the bubble going: Subprime auto loans continue to grow as credit worthy customers drop out of the market.

Posted by in auto loans, autos,

Low interest rates create an environment that encourages debt based spending.  In regards to monetary policy, this is how you grease the wheels to get the economic engine spinning.  As part of your financial arsenal this can be used in moderation but the Fed has been using maximum credit leverage since the economy imploded and this short-term fix is now running into its seventh year.  The outcomes are expected with inflation running rampant in credit heavy items like housing, cars, and college tuition.  But with housing, big banks and investors have crowded out regular buyers thus pushing the homeownership rate lower.  So credit based spending has been in full effect with auto loans and student debt.  As many credit worthy Americans were deep in debt, the temptation to go into subprime loans has accelerated dramatically.  Subprime auto debt is running rampant.  Student debt is now the most delinquent debt class in America.  Subprime debt is once again super charging the debt fueled market.

Subprime debt is back in a big way

Over the last seven years courtesy of the Fed’s low rate policies, auto and student debt has surged in dramatic fashion.  While the shrinking middle class is unable to purchase homes with inflated values, many are still chasing the dream by going into debt for cars and college.

The debt growth in these markets is nothing short of fantastic:

091015-DRE-Student-and-Auto-Loan-Debt-Chart1

This right here is the manifestation of low interest rates and the impact it has had on consumer spending.  We’ve essentially allowed Americans to buy cars on borrowed money and go to college on big debt while making it tougher for them to purchase homes.  Inflation is real if you look carefully.

What is scarier about this sudden growth is that much of the debt is being made to people that are having a difficult time paying it back.  Take a look at subprime auto debt:

subprime auto loans

This chart tells it all.  For auto loans since 2010 the growth in lending has come to consumers with credit scores of 620 or less.  Those with higher credit scores of 720 have seen modest growth.  Those with lower scores have seen nearly a 100 percent increase in loans while those with better scores have seen less than a 40 percent increase.  In other words, the bulk of new cars are being bought with financing with those having trouble managing their current debt.

With cars costing $30,000 and higher, this is no small price tag.  Any tiny little hiccup in the economy and this is enough to send their auto purchase into repossession.  Do people remember the cash for clunkers and auto industry bailouts?  These things did not happen too long ago.  It appears that we are setting ourselves up perfectly for another kind of these scenarios.

The results of prolonged artificially low rates is that the market is now fully addicted to this environment.  The Fed is backed into a corner and they really have very little ammo left.  Speculative lending is already dominating the market.  You can see the subprime booms very clearly:

subprime lending

I would argue that many college loans are subprime especially if they are made to students going to for-profit paper mills.  At least with subprime auto debt, you are getting a tangible item in a car.  With a for-profit, you are getting nothing, not even an education.  The only education you are getting is the shady under belly of subprime student loans for a subprime degree.

The economy is clearly slowing down.  Recessions happen.  And once again we have saddled a large enough group of Americans with debt where the pain will be deeply felt when the correction hits again.

MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK -Sept 20th, 2015 - Sept. 26th, 2015      
BOND BUBBLE     1
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates     2
GEO-POLITICAL EVENT     3
CHINA BUBBLE     4
JAPAN - DEBT DEFLATION     5

EU BANKING CRISIS

   

6

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MACRO News Items of Importance - This Week

GLOBAL MACRO REPORTS & ANALYSIS

     

US ECONOMIC REPORTS & ANALYSIS

     
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES      
     
Market Analytics
TECHNICALS & MARKET ANALYTICS

 

   
COMMODITY CORNER - AGRI-COMPLEX   PORTFOLIO  
SECURITY-SURVEILANCE COMPLEX   PORTFOLIO  
     
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
2015 - FIDUCIARY FAILURE 2015 THESIS 2015
2014 - GLOBALIZATION TRAP 2014

2013 - STATISM

2013-1H

2013-2H

2012 - FINANCIAL REPRESSION

2012

2013

2014

09-21-15 THESIS

 

FINANCIAL REPRESSION

 

2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS

2011

2012

2013

2014

2010 - EXTEND & PRETEND

   
THEMES - Normally a Thursday Themes Post & a Friday Flows Post
I - POLITICAL
     
CENTRAL PLANNING - SHIFTING ECONOMIC POWER - STATISM   THEME  

- - CORRUPTION & MALFEASANCE - MORAL DECAY - DESPERATION, SHORTAGES.

  THEME
- - SECURITY-SURVEILLANCE COMPLEX - STATISM M THEME  
- - CATALYSTS - FEAR (POLITICALLY) & GREED (FINANCIALLY) G THEME  
II-ECONOMIC
     
GLOBAL RISK      
- GLOBAL FINANCIAL IMBALANCE - FRAGILITY, COMPLEXITY & INSTABILITY G THEME  
- - SOCIAL UNREST - INEQUALITY & A BROKEN SOCIAL CONTRACT US THEME  
- - ECHO BOOM - PERIPHERAL PROBLEM M THEME  
- -GLOBAL GROWTH & JOBS CRISIS      
- - - PRODUCTIVITY PARADOX - NATURE OF WORK   THEME

MACRO ANALYTICS w/ CHS

- - - STANDARD OF LIVING - EMPLOYMENT CRISIS, SUB-PRIME ECONOMY US THEME
MACRO ANALYTICS w/ CHS
III-FINANCIAL
     
FLOWS -FRIDAY FLOWS

MATA

RISK ON-OFF

THEME
CRACKUP BOOM - ASSET BUBBLE   THEME  
SHADOW BANKING - LIQUIDITY / CREDIT ENGINE M THEME  
GENERAL INTEREST

 

   
STRATEGIC INVESTMENT INSIGHTS - Weekend Coverage

 

RETAIL - CRE

 

 

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US DOLLAR

 

 

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YEN WEAKNESS

 

 

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