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deleveraging

Image | Why This Recovery Is Coming to an End
Why This Recovery Is Coming to an End
 PREVIEW
by Gregor Macdonald

Executive Summary

  • Fertility rates are experiencing a "natural decrease" at record levels across the U.S.
  • Poverty rates are rising across the country, despite the "recovering" economy
  • What exactly is "powering" U.S. economic growth? Perhaps much less than realized.
  • Why we are likely in the calm before the storm when corporate profits peak right before an economic downturn
  • The 3 most likely scenarios for the stock market from here

If you have not yet read Part I: Marking the 4-Year Reflationary Rally: How Much Better Off Are We Really?, available free to all readers, please click here to read it first.

One of the challenges the U.S. stock market will increasingly face in the years ahead is continued growth in the Dependency Ratio. The U.S. Census Bureau alerted us to this trend back in 2010. For keen observers of demographics, this couldn’t have been a surprise). The rate at which the Dependency Ratio is growing, and is set to grow further, is accelerating:

The U.S. Census Bureau reported today that the dependency ratio, or the number of people 65 and older to every 100 people of traditional working ages, is projected to climb rapidly from 22 in 2010 to 35 in 2030. This time period coincides with the time when baby boomers are moving into the 65 and older age category…The expected steep rise in the dependency ratio over the next two decades reflects the projected proportion of people 65 and older climbing from 13 percent to 19 percent of the total population over the period, with the percentage in the 20 to 64 age range falling from 60 percent to 55 percent…“This rapid growth of the older population may present challenges in the next two decades,” said Victoria Velkoff, assistant chief for estimates and projections for the Census Bureau's Population Division. “It's also noteworthy that those 85 and older — who often require additional caregiving and support — would increase from about 14 percent of the older population today to 21 percent in 2050.”

This is precisely one of the key, ongoing headwinds that faced Japan's stock market for 20 years. When Japan's economy moved steadily into its low-growth phase, unable to generate sufficient jobs, fertility rates and household formation declined rapidly. As I explained in The Arrival of Japan's Sunset, these will not be cured by the current devaluation of the yen, despite naïve cheerleading. And neither will they be solved here in the U.S.

But in contrast to Japan, the United States is only just embarking on its slow growth phase. Its demographically challenged culture and economy will reinforce each other as we move ahead in time. And, it's not just the retiring class of workers that will massively increase the Dependency Ratio in the U.S. in years ahead…

Why This Recovery Is Coming to an End
 PREVIEW by Gregor Macdonald

Executive Summary

  • Fertility rates are experiencing a "natural decrease" at record levels across the U.S.
  • Poverty rates are rising across the country, despite the "recovering" economy
  • What exactly is "powering" U.S. economic growth? Perhaps much less than realized.
  • Why we are likely in the calm before the storm when corporate profits peak right before an economic downturn
  • The 3 most likely scenarios for the stock market from here

If you have not yet read Part I: Marking the 4-Year Reflationary Rally: How Much Better Off Are We Really?, available free to all readers, please click here to read it first.

One of the challenges the U.S. stock market will increasingly face in the years ahead is continued growth in the Dependency Ratio. The U.S. Census Bureau alerted us to this trend back in 2010. For keen observers of demographics, this couldn’t have been a surprise). The rate at which the Dependency Ratio is growing, and is set to grow further, is accelerating:

The U.S. Census Bureau reported today that the dependency ratio, or the number of people 65 and older to every 100 people of traditional working ages, is projected to climb rapidly from 22 in 2010 to 35 in 2030. This time period coincides with the time when baby boomers are moving into the 65 and older age category…The expected steep rise in the dependency ratio over the next two decades reflects the projected proportion of people 65 and older climbing from 13 percent to 19 percent of the total population over the period, with the percentage in the 20 to 64 age range falling from 60 percent to 55 percent…“This rapid growth of the older population may present challenges in the next two decades,” said Victoria Velkoff, assistant chief for estimates and projections for the Census Bureau's Population Division. “It's also noteworthy that those 85 and older — who often require additional caregiving and support — would increase from about 14 percent of the older population today to 21 percent in 2050.”

This is precisely one of the key, ongoing headwinds that faced Japan's stock market for 20 years. When Japan's economy moved steadily into its low-growth phase, unable to generate sufficient jobs, fertility rates and household formation declined rapidly. As I explained in The Arrival of Japan's Sunset, these will not be cured by the current devaluation of the yen, despite naïve cheerleading. And neither will they be solved here in the U.S.

But in contrast to Japan, the United States is only just embarking on its slow growth phase. Its demographically challenged culture and economy will reinforce each other as we move ahead in time. And, it's not just the retiring class of workers that will massively increase the Dependency Ratio in the U.S. in years ahead…

Image | Welcome to the Era of ‘Ugly’ Inflation
Welcome to the Era of ‘Ugly’ Inflation
by charleshughsmith

A year ago, in the wake of then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency has strengthened notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

The Siren Song of 'Beautiful Deleveraging'

In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.

Welcome to the Era of ‘Ugly’ Inflation
 by charleshughsmith

A year ago, in the wake of then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency has strengthened notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

The Siren Song of 'Beautiful Deleveraging'

In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.

Image | Why the U.S. Dollar, Counterintuitively, May Strengthen from Here
Why the U.S. Dollar, Counterintuitively, May Strengthen from Here
 PREVIEW
by charleshughsmith

Executive Summary

  • Why to expect household income will continue to decline (in real terms)
  • The ceiling that the price of oil may place on central bankers' ability to print money
  • Why money printing does not always result in inflation
  • The argument for a stable and/or strengthening U.S. dollar

A year ago, in the wake of the then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency did indeed strengthen notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

If you have not yet read Part I: Welcome to the Era of 'Ugly' Inflation, available free to all readers, please click here to read it first.

In Part I, we covered “beautiful deleveraging,” the goal of which is to systemically distribute the financial pain so the Status Quo is left intact, and the threat to this strategy posed by “ugly inflation.”  The critical difference between “beautiful” and “ugly” inflation is that incomes keep pace with the rising cost of goods and services in the former and are stagnant in the latter.  In ugly inflation, households’ discretionary income declines, reducing consumption, slowing investment, and crippling future borrowing.  Defaults rise; consumption, tax revenues, and lending decline; and the economy enters a self-reinforcing feedback loop of contraction.

This is the position the U.S. economy is in, as real household income has declined 8% since 2007 and inflation officially bubbles along at 2-3% (and at a higher rate for many essentials).

The Status Quo attempt to painlessly inflate our way out of over-leveraged indebtedness has run up against limits that are not apparent in a strictly financial model like Ray Dalio’s “beautiful deleveraging.” If we understand these other forces and tipping points, we will understand why central-bank deleveraging will fail.

Why the U.S. Dollar, Counterintuitively, May Strengthen from Here
 PREVIEW by charleshughsmith

Executive Summary

  • Why to expect household income will continue to decline (in real terms)
  • The ceiling that the price of oil may place on central bankers' ability to print money
  • Why money printing does not always result in inflation
  • The argument for a stable and/or strengthening U.S. dollar

A year ago, in the wake of the then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency did indeed strengthen notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

If you have not yet read Part I: Welcome to the Era of 'Ugly' Inflation, available free to all readers, please click here to read it first.

In Part I, we covered “beautiful deleveraging,” the goal of which is to systemically distribute the financial pain so the Status Quo is left intact, and the threat to this strategy posed by “ugly inflation.”  The critical difference between “beautiful” and “ugly” inflation is that incomes keep pace with the rising cost of goods and services in the former and are stagnant in the latter.  In ugly inflation, households’ discretionary income declines, reducing consumption, slowing investment, and crippling future borrowing.  Defaults rise; consumption, tax revenues, and lending decline; and the economy enters a self-reinforcing feedback loop of contraction.

This is the position the U.S. economy is in, as real household income has declined 8% since 2007 and inflation officially bubbles along at 2-3% (and at a higher rate for many essentials).

The Status Quo attempt to painlessly inflate our way out of over-leveraged indebtedness has run up against limits that are not apparent in a strictly financial model like Ray Dalio’s “beautiful deleveraging.” If we understand these other forces and tipping points, we will understand why central-bank deleveraging will fail.

Image | Paul Brodsky: Central Banks are Nearing the ‘Inflate or Die’ Stage
Paul Brodsky: Central Banks are Nearing the ‘Inflate or Die’ Stage
by Adam Taggart

"It's impossible to have a political solution to a balance sheet problem" says Paul Brodsky, bond market expert and co-founder of QB Asset Management.

The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global "debt jubilee" transpires, which Paul thinks is unlikely).

Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.

So how will this debt overhang be resolved?

Central bank money printing — and lots of it — thinks Paul.
Paul Brodsky: Central Banks are Nearing the ‘Inflate or Die’ Stage
 by Adam Taggart

"It's impossible to have a political solution to a balance sheet problem" says Paul Brodsky, bond market expert and co-founder of QB Asset Management.

The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global "debt jubilee" transpires, which Paul thinks is unlikely).

Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.

So how will this debt overhang be resolved?

Central bank money printing — and lots of it — thinks Paul.
Image | The Deleveraging Pain Is Just Beginning
The Deleveraging Pain Is Just Beginning
 PREVIEW
by charleshughsmith

Executive Summary

  • How much have households, corporations, and the government combined deleveraged since 2008? (Barely at all.)
  • Have our national debt-to-income ratios improved since 2008? (No, they've gotten worse.)
  • Increasingly, unlevered assets will be sold to maintain the phantom value of levered assets.
  • Ultimately, levered losses will need to be taken. Cash and cash equivalents will be in high demand as this happens.

Part I: The Pernicious Dynamics of Debt, Deleveraging, and Deflation

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Deleveraging Pain Is Just Beginning

In Part I, we sought an understanding of the causal linkages between debt, deleveraging, and deflation. In Part II, we analyze the key data and charts to get a better understanding of how far deleveraging has to go.

The basic idea in deleveraging is that debt exceeds the value of the underlying asset—for example, a mortgage exceeds the value of the home. The difference must be made up with savings from income or from the sale of other assets, or the asset must be sold and the loss booked.

In the case of consumer and government debt, the underlying assets are, in effect, future income and future tax revenues. The student has no assets to sell to pay off a student loan; the loan was leveraged off future income. The same is true of government bonds.  Though consumers often maintain that the goods they bought on credit have retained value, in many cases the market value of items bought on credit is far below the debt still to be paid.

The situation is thus dire for loans without underlying assets that can be sold. Cash to service these loans must be raised by selling other assets or by diverting income.

I see the forces of debt, deleveraging, deflation, and inflation (money-printing) as positive (self-reinforcing) and negative (countervailing) feedback loops; the interactions are complex and can oscillate in dynamic equilibrium until a crisis pushes the system firmly into disequilibrium.

The Deleveraging Pain Is Just Beginning
 PREVIEW by charleshughsmith

Executive Summary

  • How much have households, corporations, and the government combined deleveraged since 2008? (Barely at all.)
  • Have our national debt-to-income ratios improved since 2008? (No, they've gotten worse.)
  • Increasingly, unlevered assets will be sold to maintain the phantom value of levered assets.
  • Ultimately, levered losses will need to be taken. Cash and cash equivalents will be in high demand as this happens.

Part I: The Pernicious Dynamics of Debt, Deleveraging, and Deflation

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Deleveraging Pain Is Just Beginning

In Part I, we sought an understanding of the causal linkages between debt, deleveraging, and deflation. In Part II, we analyze the key data and charts to get a better understanding of how far deleveraging has to go.

The basic idea in deleveraging is that debt exceeds the value of the underlying asset—for example, a mortgage exceeds the value of the home. The difference must be made up with savings from income or from the sale of other assets, or the asset must be sold and the loss booked.

In the case of consumer and government debt, the underlying assets are, in effect, future income and future tax revenues. The student has no assets to sell to pay off a student loan; the loan was leveraged off future income. The same is true of government bonds.  Though consumers often maintain that the goods they bought on credit have retained value, in many cases the market value of items bought on credit is far below the debt still to be paid.

The situation is thus dire for loans without underlying assets that can be sold. Cash to service these loans must be raised by selling other assets or by diverting income.

I see the forces of debt, deleveraging, deflation, and inflation (money-printing) as positive (self-reinforcing) and negative (countervailing) feedback loops; the interactions are complex and can oscillate in dynamic equilibrium until a crisis pushes the system firmly into disequilibrium.

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