First a movie recommendation: I finally watched The Big Short (I know, I’m behind) which detailed several risk-hardy investors who, in 2007-08, bet against the housing market. Since I watched the movie, I am now of course an expert who can share his opinion about the financial crisis. One of the takeaways was how obvious the signals were, and how so many bankers, brokers, and investors deluded each other and the world until the bubble popped. Another is that the financial industry may be repeating the same mistakes right under our nose. The film finishes with a dire warning – a chilling siren – that Bespoke Tranche Opportunities are essentially just renamed Collateralized Debt Obligations (CDO’s), one of the instruments that lead to the crisis. In all fairness, this isn’t entirely correct. Yes, these are derivatives, but mostly made up of corporate debt approaching ‘only’ $20 billion a year. In comparison, the real estate bubble occurred due to the securitization of residential subprime loans of over a trillion dollars annually.
BTO’s are not the underlying reason for impending economic risk in 2016, ’17 & ’18 as that honor falls to the United States Government itself. When pertaining to leverage, Uncle Sam is backing over 90 percent of America’s risky mortgages. The FHA and VA loans are now available with up to 97% LTV, while passing off the risk to the taxpayer. Since the banks are mostly restricted to lend to actual qualified borrowers, non-bank lenders have filled the void for the ‘less than qualified’ market. Historically, non bank lenders fail at a much higher rate than regular banks.
However, those who have read my previous economic ramblings may recall the references to other significant threats to the economy. Since 2009 there have been a number of consistent bears who have been calling for a cataclysm; Your David Stockman’s, Paul Farrell’s, Peter Schiff’s and Robert Samuelson‘s to name a few. These and many similar bears have been laughed at as the stock market hit Fed induced giddy heights.
However, one individual, who is not your typical ‘bear’, is Jeffrey Snider at Alhambra Investments. Snider’s recent report Not Just Manufacturing, The Global Slowdown Is Monetary has received it’s share of publicity, thanks to folks like John Mauldin. Snider points to a business climate worldwide that is contracting and starts by pointing to the canary in the coalmine: a massive slowdown in big-rig truck orders suggesting businesses remain cautious about expansion.
"The Wall Street Journal reported a few days ago (h/t ZeroHedge) on the status of the ongoing disruption in domestic production of long haul trucks and vehicles. In what can only be confirmation of the state of US manufacturing, the huge drop in orders for new trucks matches shippers’ perceptions of the actual economic flow in goods. While economists want that to be an isolated circumstance of only manufacturing, goods activities account for a significant proportion of services as well. And it is getting bad."
Snider presents a series of charts which are rather alarming.
"It is textbook economics (the real, common sense version, not orthodox econometrics). You have commodity prices falling and crashing, and then being met by puzzling restrictions in economic growth – a general and global slowdown dating back years. Because it doesn’t conform to the usual business cycle and because the monetary phenomenon we are talking about here isn’t consider “money” by economists, they ignore the obvious. This displays all the symptoms of shrinking money supply, and it all dates back to 2011.
It is, by far, much worse than just a recession, not the least of which is due to the distinct possibility that they could combine. More than that, since these are unique circumstances unlike anything observed in modern economic history we can’t really anticipate how or even where it might end and turn around. In many places, this money supply-driven slowdown has already achieved truly drastic proportions – and it only looks to continue."
Note to candidates up and down the ballot: Even though the current Administration tells us otherwise, most of us are adults. It’s no secret the economy barely has a pulse. We see it in our daily lives. Even the Federal Reserve stated such at last week’s FOMC; The economy “appears to have slowed.” So why don’t YOU lead with this? Why is the 0.5% GDP not the first thing coming out of your mouths?
Voters are exhausted with the media shoving personality politics into our daily consciousness. We are fed-up and angry. We want straight talk. We want to understand your policies, not just listen to your ethereal happy-talk. Some of your voters may be open-mouthed breathers, but many of us actually know a few things. We are hungry for leaders who will not only acknowledge voter displeasure with still feeling angst 8 years into a non-recovery but WHAT they will do about it. If Trump is to be the nominee, it’s time for specifics. What will a President Trump actually do that will spur the economy, and it has to make fiscal sense to the folks mentioned above, because they will do the math.