Increased delinquencies in the auto sector will spell trouble given the high LTVs of loans and lower credit scores of borrowers. And I am troubled by the OCC’s depiction of the commercial real estate sector; we could see heavy loan losses there in the next downturn.
Yesterday, Ally Financial warned that profits would underperform expectations. Now, they dd not say that profits would fall or that they were taking credit writedowns. Neverthless, the warning is an important marker and should be of grave concern. Here’s why.
About a month ago, I wrote a post on how market contagion would happen due to deteriorating credit conditions in energy high yield. And while this doesn’t necessarily lead to recession or financial crisis, it has already meant a real economy slowdown in the US. When the business cycle does […]
The first time I wrote about shale oil resource misallocation in the wake of lower oil prices was back in October 2014, exactly a year ago. A lot has happened in that year, so I want to look back at the oil-related posts I have written in that time frame and recap the overall message. As it stands today that message is that oil price declines have two major effects, one positive and one negative. The positive is the dividend to consumers. The negative is the loss of capital investment and jobs in the oil sector. Which one will be more important is not yet clear, but today I will focus on the negative.
These debt-related shocks will occur regularly for many more years, and each shock will advance or retard the rebalancing process so that it affects the way future shocks occur. There are only a few broad paths along which the Chinese economy can rebalance, and if we can get some sense of the China’s institutional constraints and balance sheet structures, we can figure what these paths are and how likely we are to slip from one to another. In order to get Chinas right I would argue that above all we must understand the dynamics of debt, and of balance sheet structures more generally.
As a technophile, I follow the tech space assiduously both in terms of products and trends as well as companies and strategy. Every quarter that Apple announces, I have made it a habit of commenting on their quarter, because they are the largest technology company in the world. This quarter, I thought I would add IBM and Amazon to the mix because there are important takeaways from their earnings as well. With Apple, the question is innovation and dependence on the iPhone. For IBM, the question is real earnings versus financial engineering. And for Amazon, the question I want to address here is net income versus cash flow.
Here is a chart showing the number of transactions that involve acquisitions of an asset management business by year. It tells us about a couple of trends developing in recent years.
Themes for today:
The US faces political constraints in a cyclical downturn that will limit government response
The US private surplus is under assault
Europe is improving and upgrades to bank stocks are bullish
The Fed tends to tighten before wage growth becomes sustainedEM hidden external debt in eastern Europe makes Ukraine a potential point of contagion
EM hidden external debt is large in China, Brazil and Russia
Loan growth rate in the US, while better than in the Eurozone, remains on a downward path. The latest figures suggest that loans are increasing at less than 2%, while deposits continue to grow at 6-7% per year.
Owning shares in a bank is the functional equivalent of owning a call option on the bank’s future operational earnings, and if the share price contains little intrinsic value (i.e. the value of its assets does not exceed the value of its liabilities by a large margin, and may even be less than the value of liabilities), by definition most of its value consists of time value, and so is extremely sensitive to changes in expectations.
Credit underwriters pride themselves in their ability to cut lending when they sense that economic fundamentals have changed for the worse. For example one often hears bankers talking about passing on deals in 2007 because of “not liking the fundamentals” or “the markets looked stretched”. But historical data suggests otherwise.
European banks continue to be engaged in deleveraging. It is partly driven by new capital requirements and partly by preparing for the next year’s ECB’s asset quality review and stress test. The deleveraging process includes reducing assets and boosting regulatory capital. Italian and Spanish officials are finding creative ways to help the banks.