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Hello everyone.
What a week it's been, and if I'm right,
what lies ahead is going to blow our socks off, and not in a nice way!
It may not feel like it,
but, I think we are living through the end of the credit based economy.
I have picked the U.S as the basis for the following studies, but the same dynamics are evident across the developed world.
The U.S is still the largest economy in the world - so it's always worth focusing on.
First we look at corporations:
Corporate profits as a % of the overall economy are always moving within a cycle.
This cycle tends to top out every 10 years or so at about 7% historically.
This is the height of the business cycle, and from that point on you are heading back into the next recession and cycle low.
And as you can see below the cycle this time around was longer than average,
but the top is in, without a doubt.
We are now in the down slope towards a very large recession.
This time I think we will go negative again as with the great depression.
Here's the overall level of non financial debt securities shown with it's annual rate of change.
The roc has now dropped below 4% Y/Y
while the overall debt level is 100% higher than than the 2008 levels at over 6 trillion.
Now take a guess where the money for all those stock buy-backs came from...............
This bubble is going to deflate catastrophically.
No more stock buy-backs from now on!
This is another view on the credit cycle,
The high yield corporate debt index has been floored for the last few years as a result of ultra easy monetary policy,
where investors chase yield into every dark corner that they can find it.
High yield was very attractive relative to U.S treasury debt, especially when the pension industry has to engineer an avg 8% return per annum just to stay solvent!
Well high yield debt is now heading higher and back into the risky category it should always have been.
This will of course cause bond prices to collapse, and in-turn put huge pressure on the pension industry in the next recession.
Who do we think will be screaming for a bailout the loudest when the crash comes, you guessed it!
Bank credit to corporations has been trending down off the cycle high in 2016.
This is already a drag on GDP,
And it should serve as a leading indicator for employment, less corporate investment = less jobs to fill.
The housing industry has topped out and is already turning down in a big way when you look at the anecdotal evidence in the news.
Here is the reason why,
Mortgage debt is cycling lower again after creating a double top in outstanding debt this year.
YoY acceleration has been stuck at about 4% for the last few years,
but the downward slide will begin again.
This one will again crush the banking industry.
Here is the reason why the big auto manufacturers are shedding jobs.
Auto loan acceleration (RHS) topped out in 2016, and the deceleration has been ongoing since then.
The zero line is looking very close at hand.
The auto industry is now facing another carmageddon!
Credit card debt is also back into the downward side of the cycle after topping out in 2017.
People are just as indebted as they ever were.
And the same dynamic will take hold this time as the recession ramps up,
people will cut out their credit based expenditure, and then exacerbate the recession.
A cycle driven by increasing credit to the upside will be driven by declining credit to the downside.
The U.S economy has a debt load of 67+ Trillion USD.
That is about 21% higher than in 2008!
And as you can see the overall debt level only flattened out during the great recession.
What will happen in the real economy if the overall debt level actually declines in a meaningful way in the next depression?
This is not a rosey outlook on my part.
The only silver lining is this;
If you can manage to stay solvent, with cash at your disposal during the worst of the declines,
you will have the pick of the best assets at 10 cents on the dollar at the bottom.
Patience will pay big dividends this time......
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That wraps up another week folks,
I hope you all enjoy your weekend,
See you back here on Monday night again.
God's speed to one and all!
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