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Another good paper from Koo


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In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt.

 

 

This time it's mostly chargeoffs in the US that's driving it, not "savings or paying down debt".

 

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In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt.

 

 

This time it's mostly chargeoffs in the US that's driving it, not "savings or paying down debt".

 

What do you mean?  Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities?

 

Maybe you meant defaults and debt to equity conversion?

 

 

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In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt.

 

 

This time it's mostly chargeoffs in the US that's driving it, not "savings or paying down debt".

 

What do you mean?  Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities?

 

Maybe you meant defaults and debt to equity conversion?

 

I'm thinking about how BAC and their peers are collectively paying down the debts of consumers courtesy of positive yet weakened bank earnings.

 

Yet the health of the bank balance sheets are improving at the same time. 

 

The banks are like consumer debt paper shredders.

 

Just look at the credit card charge-off rates over the past 3 years.  You have had chargeoff rates go at high as 10%, but the historical norm is more like 5%.  So that's rapid deleveraging, courtesy of would-be bank earnings.

 

Yet the banks can absolutely afford to do it.  Capital ratios have been building at the same time.

 

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In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt.

 

 

This time it's mostly chargeoffs in the US that's driving it, not "savings or paying down debt".

 

What do you mean?  Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities?

 

Maybe you meant defaults and debt to equity conversion?

 

I'm thinking about how BAC and their peers are collectively paying down the debts of consumers courtesy of positive yet weakened bank earnings.

 

Yet the health of the bank balance sheets are improving at the same time. 

 

The banks are like consumer debt paper shredders.

 

Just look at the credit card charge-off rates over the past 3 years.  You have had chargeoff rates go at high as 10%, but the historical norm is more like 5%.  So that's rapid deleveraging, courtesy of would-be bank earnings.

 

Yet the banks can absolutely afford to do it.  Capital ratios have been building at the same time.

 

Okay, I see what you're saying, but I would characterize that as defaults and forced haircuts on consumer debt, as opposed to willing deb reductions, and only partially the reason for our accelerated private sector deleveraging. 

 

Not sure what is mostly driving the deleveraging.  Bank charge offs (i.e., consumer and corporate defaults, haircuts, and reductions) play a large role, but so does corporate sector pay off of debt, capital markets debt to equity conversions, and increased savings by US consumers despite essentially zero return on their money when put into bank deposits.

 

Point being that both increased savings and debt reduction is occurring in the private sector.  Not true in the public sector, of course.

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In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt.

 

 

This time it's mostly chargeoffs in the US that's driving it, not "savings or paying down debt".

 

What do you mean?  Don't charge offs decrease the health of balance sheets by reducing assets relative to liabilities?

 

Maybe you meant defaults and debt to equity conversion?

 

I'm thinking about how BAC and their peers are collectively paying down the debts of consumers courtesy of positive yet weakened bank earnings.

 

Yet the health of the bank balance sheets are improving at the same time. 

 

The banks are like consumer debt paper shredders.

 

Just look at the credit card charge-off rates over the past 3 years.  You have had chargeoff rates go at high as 10%, but the historical norm is more like 5%.  So that's rapid deleveraging, courtesy of would-be bank earnings.

 

Yet the banks can absolutely afford to do it.  Capital ratios have been building at the same time.

 

Okay, I see what you're saying, but I would characterize that as defaults and forced haircuts on consumer debt, as opposed to willing deb reductions, and only partially the reason for our accelerated private sector deleveraging. 

 

 

Japan had a MAXIMUM unemployment rate of 5.5% and did not have non-recourse real estate lending.

 

Can you imagine how slow our consumer debt deleveraging would be coming along if everyone was still employed and we couldn't walk from our mortgages?

 

The putbacks are just more of the same -- bank paper shredder.

 

And no, it's not voluntary on the banks behalf.  Yet I am still grateful.

 

The non-recourse lending may have encouraged recklessness, but that's water under the bridge.  From here on out, it's a wonderful thing as the cleansing process is happening much faster.  Instead of somebody stuck paying a massive mortgage, they walk.  The banks have a few years of depressed earnings and we're done.

 

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Not sure what is mostly driving the deleveraging.  Bank charge offs (i.e., consumer and corporate defaults, haircuts, and reductions) play a large role, but so does corporate sector pay off of debt, capital markets debt to equity conversions, and increased savings by US consumers despite essentially zero return on their money when put into bank deposits.

 

Point being that both increased savings and debt reduction is occurring in the private sector.  Not true in the public sector, of course.

 

See the graph page 10 of JPMorgan's presentation:

Consumer deleveraging largely driven by charge-offs

 

http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

 

 

 

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Not sure what is mostly driving the deleveraging.  Bank charge offs (i.e., consumer and corporate defaults, haircuts, and reductions) play a large role, but so does corporate sector pay off of debt, capital markets debt to equity conversions, and increased savings by US consumers despite essentially zero return on their money when put into bank deposits.

 

Point being that both increased savings and debt reduction is occurring in the private sector.  Not true in the public sector, of course.

 

See the graph page 10 of JPMorgan's presentation:

Consumer deleveraging largely driven by charge-offs

 

http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

 

Interesting presentation.  On page 9, the presentation says that about half of the reduction in the consumer debt service ratio is a result of lower interest rates and refinancing, with the rest being driven by "charge-offs and deleveraging."  I take it that deleveraging in that part of the presentation means paying off debt; otherwise, that doesn't make sense in the context of the next slide.

 

I suspect firm deleveraging has been driven mostly by productivity gains (both in technology and labor), paying down debt, and conversion of capital markets debt to equity either by default and reorg or by voluntary conversion.

 

But I don't have any data for that theory, so it's just a guess.

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On page 9, the presentation says that about half of the reduction in the consumer debt service ratio is a result of lower interest rates and refinancing

 

The cool thing is that it not only takes pressure off the debt service ratio, but it also drives the debt down at a faster pace.

 

25% of the loan is paid off in 11 years at 4% fixed interest rate.

16% of the loan is paid off in 11 years at 7% fixed interest rate.

 

Refinancing speeds up consumer deleveraging even though discretionary spending can rise at the same time. 

 

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Other than housing, I am seeing all prices go up. Some examples are

 

- a roll of bathroom tissue from costco now costs $20 which cost $11 in 2004/2005

- the minimum wage is on its way up  ( or already up even in Palin country like Alaska )

- the price of coffee

- price of food in restaurants ( up from 20-50% ) from 2008

 

 

Inflation in that which you want to buy...

 

Deflation in that which you want to sell...

 

(Unless you are in the market for a house which in many parts of the U.S. is a very good idea right now)

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Eric you may be on to something. Perhaps a bailout of the banks was prudent, though a direct bailout of the consumer might have had a better result. Bank experiences excess earnings, and absorbs bad debts. Consumer is free from debt and is prevented from borrowing for 7-8 years.

 

The major issue I see is much of the growth in the last few decades was fueled by borrowing. We no longer have that fuel boost....

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It is interesting that one method of deleveraging the consumer, charge-offs, falls on the backs of bank shareholders, while the other method, low interest rates, falls on the backs of savers in general. 

 

On the other hand, if interest rates are supposed to match up with the inflation rate, and there is no inflation, then low interest rates aren't really producing that much of a subpar return for savers.  So the question is whether there is inflation or not, which is what a lot of the macro posts related to gold and QE are about.

 

Core inflation was last measured at 2%.  But core inflation excludes food and energy prices, I believe.  We all know that those things have gone up in price.

 

Question is: how much of the inflation in food and energy prices -- and commodities, in general -- is related to QE (which some characterize as printing money but which others don't), versus capital flow into commodities stirred by expectations of currency devaluation, versus anomalous events such as drought and other extreme weather, versus changes in the supply/demand fundamentals in the short term (e.g., supply disruptions in the Middle East)?

 

Very tough thing to figure out. 

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