16/5/19: Gundlach on the U.S. Economy and Debt Super-cycle

U.S. growth over the past five years is based “exclusively” on government, corporate and household debt, according to Jeffrey Gundlach, chief executive of DoubleLine Capital, as reported by Reuters (link below). This is hardly surprising. In my forthcoming article for Manning Financial (in print since last week), I am covering the shaky statistical nature of the U.S. GDP growth figures, and the readers of this blog would know my view on the role of leverage (debt) in the real economy as a drug of choice for boosting superficial medium term growth prospects in the U.S., Europe and elsewhere around the world. What is interesting in Gundlach's musings is that we now see mainstream WallStreet admitting the same.

Per Gundlach, the U.S. economy would have contracted in nominal GDP terms (excluding inflation effects) three out five last years if the United States had not added trillions in new government debt. Just government debt alone. “One thing everybody seems to miss when they look at these GDP numbers ... they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt - government debt, also corporate debt and even now some growth in mortgage debt.”

And if private sector debt did not expand, U.S. "GDP would have been very negative.” Per Reuters report, nominal GDP rose by 4.3%, but total public debt rose by 4.7% over the past five years, Gundlach noted. "Against this debt backdrop and financial markets “addicted to Federal Reserve stimulus,” these are “very, very dangerous times” for the next U.S. recession, Gundlach ...said."

Per CMBC report on the same speech, Gundlach said that “Any thoughtful person would be concerned... It’s sounding like a pretty bad cocktail of economic risk, and risk to the long end of the bond market.”

As reported by Reuters: https://www.reuters.com/article/us-funds-doubleline-gundlach/u-s-growth-would-have-contracted-without-trillions-in-government-consumer-debt-gundlach-idUSKCN1SK2KW and by CNBC https://www.cnbc.com/2019/05/14/doublelines-gundlach-warns-of-recession-cocktail-of-economic-risk.html

As the charts below show, Gundlach is correct: we are in a continued leverage risk super-cycle. While nominal debt to nominal GDP ratio remains below pre-GFC peak, nominal levels of debt are worrying and debt dynamics are showing sharpest or second sharpest speed of leveraging during the current recovery phase. Worse, since the start of the 1990s, all three non-financial debt sources, households, corporates and the Government, are drawing increasing leverage. 

1/8/18: Household Debt and the Cycle

So far, lack of huge uplift in household debt in the U.S. has been one positive in the current business cycle. Until, that is, one looks at the underlying figures in relevant comparative. Here is the chart from FactSet on the topic:

What does this tell us? A lot:

1. Nominal levels of household debt are up above the pre-crisis peak. 
2. Leverage levels (debt to household income ratio) is at 17 years low.
3. Mortgage debt is increasing, and is approaching its pre-crisis peak: mortgage debt stood at $10.1 trillion in 1Q 2018, just 5.7% below the 2008 peak. 
4. Consumer credit has been growing steadily throughout the 'recovery' period, averaging annual growth of 5.2% since 2010, bringing total consumer debt to an all-time high of nearly $14 trillion in early 2018. 
5. While leverage has stabilized at around 95%, down from the 124% at the pre-crisis peak, current leverage ratio is still well-above the 58% average for 1946-1999 period.
6. The above conditions are set against the environment of rising cost of debt carry (end of QE and rising interest rates). In simple math terms, 1% hike in interest rates will require (using 95% leverage ratio and 25-30% upper marginal tax brackets) an uplift of 1.19-1.24% in pre-tax income for an average family to sustain existent debt carry costs. 

The notion that the U.S. households are financially non-vulnerable to the cyclical changes in debt costs, employment and asset markets conditions is a stretch, even though the current levels of risks in leverage ratios are not exactly screaming a massive blow-out. Just as the U.S. Government has low levels of slack in the system to deal with any forthcoming shocks, the U.S. households have little cushion on assets side and on income / savings balances to absorb any significant changes in the economy.

As we say in risk management, the system is tightly coupled and highly complex. Which is a prescription for a disaster. 

11/5/16: U.S. Economy: Three Charts Debt, One Chart Growth

In his recent presentation, aptly titled "The Endgame",  Stan Druckenmiller put some very interesting charts summarising the state of the global economy.

One chart jumps out: the U.S. credit outstanding as % of GDP

In basic terms, U.S. debt deleveraging post-GFC currently puts U.S. economy's leverage ratio to GDP at the levels comparable with 2006-2007. Which simply means there is not a hell of a lot room for growing the debt pile. And, absent credit creation by households and corporates, this means there is not a hell of a lot of room for economic growth, excluding organic (trend) growth.

As Druckernmiller notes in another slide, the leveraging of the U.S. economy is being sustained by monetary policy that created unprecedented in modern history supports for debt:

And as evidence elsewhere suggests, the U.S. credit creation cycle is now running on credit cards:

Source: Bloomberg

And the problem with this is that current growth rates are approximately close to the average rate of the bubble years 1995-2007. Which suggests that in addition to being close to exhaustion, household credit cycle is also less effective in supporting actual growth.

Which is why (despite a cheerful headline given to it by Bloomberg), the next chart actually clearly shows that the U.S. growth momentum is structurally very similar to pre-recession dynamics of the 1990 and 2000:

Source: Bloomberg

Back to Druckenmiller's presentation title... the end game...

10/12/15: U.S. Corporate Debt: It's Getting Boomier

U.S. Non-financial Corporations debt - the other 'third' of the real economic debt equation - is on the rise, again. Deleveraging is not only over, but has been pushed aside. The new cycle of debt boom is well under way, and with it, the next cycle of a bust is getting closer...