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Over the weekend I had a conversation with a very good trader friend of mine from college. He's been trading 20+ years, is very knowledgeable, and has made a fortune in the markets. During our conversation he expressed concerns to me about debt levels in the United States, particularly associated with 1.) autos loans and 2.) real estate.

My initial reactions were:

  1. How bad can subprime autoloans really be? It seems like too small of issue to have a material impact on the economy.
  2. Yes, high real estate debt could be bad if prices fall enough but how much can we really expect them to fall by?


Further, we may have high debt, but interest rates are low so actual debt burdens are low:

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So my initial reaction is it isn't a big deal. The reason I bring it up is because my trader friend is the type of guy we should be listening to. He and I both were buying back in January when everyone thought a recession was upon us. Given his track record I want to look into these debt issues further and see if he might be onto something I'm overlooking.
Self-sufficiency is the greatest of all wealth. - Epicurus
Quoting Ef5
Over the weekend I had a conversation with a very good trader friend of mine from college. He's been trading 20+ years, is very knowledgeable, and has made a fortune in the markets. During our conversation he expressed concerns to me about debt levels in the United States, particularly associated with 1.) autos loans and 2.) real estate. My initial reactions were: How bad can subprime autoloans really be? It seems like too small of issue to have a material impact on the economy. Yes, high real estate debt could be bad if prices fall enough but how...
If service (interest) payments are less than 10% of disposable income (this is after ALL taxes and other things that cannot be avoided, and that means different things to different people) in Nth America, then youze must have very high incomes, which I didn't know. What is the interest rate if you are a first home buyer and wanna go out and buy a house for say $400,000?
Quoting LloydOz
{quote} If service (interest) payments are less than 10% of disposable income (this is after ALL taxes and other things that cannot be avoided, and that means different things to different people) in Nth America, then youze must have very high incomes, which I didn't know. What is the interest rate if you are a first home buyer and wanna go out and buy a house for say $400,000?
I paid 3.625% on a home I bought in September, but I think the going rate is slightly higher today... Interest payments are tax deductable in the US so the effective rate we pay is lower.

This brings up an interesting point... Central banks can go below 0%, but there’s going to be a floor on mortgage rates. There could be a time when there’s a real inability to stimulate housing through lower interest rates.
Self-sufficiency is the greatest of all wealth. - Epicurus
Quoting Ef5
1.) autos loans and 2.) real estate.
One interesting fact which I had come across recently was that US Auto loans market is close to $1.1Trillion, which in itself would be nearly 15th biggest economy in the world. If a meltdown or anything like that happens, it would have ramifications across the world.
  • Post #25
  • Quote
  • Edited 1:38pm Nov 19, 2019 1:05pm | Edited 1:38pm
Quoting swagtrading
{quote} One interesting fact which I had come across recently was that US Auto loans market is close to $1.1Trillion, which in itself would be nearly 15th biggest economy in the world. If a meltdown or anything like that happens, it would have ramifications across the world.
Just recently I saw some detailed data on car loan delinquencies in America, broken down into age group etc. Can't find it now. Levels are again approaching or exceeding that of 2008 (about 4% on average, don't quote me). They topped out in about 2009 or 2010 at I think maybe 5%, maybe more. While I don't think that says anything in itself (like most bare numbers) it may be indicative of other policies which require addressing or Paul Krugman to recommend more government control and regulations.

By the way, I query what that 1.1 trillion number actually consists of. GDP has a fairly specific definition. The simple gross amount lent/borrowed is not directly included in that measure. The money you pay for your car is included.

What is of more consequence is if one or more manufacturers would have financial difficulties. Just imagine the horror of the fallout - their executives may lose their private jets.
Quoting Ef5
{quote} Japanese asset prices really needed to go up. So much bad debt for the 89 bubble, higher prices would lift the levereaged loss burden that causes depressions. Anyway, I think it was Krugman who said something like in order to get out of a liquidity trap you need to be credibly reckless with monetary policy. The BOJ has mostly lived up to that, but I don't think everyone (hint ECB) can which is where we might run into problems. Obviously, fiscal policy would work too.
Krugman may have made a decent accountant. What is conveyed here is the opposite of what any self respecting economist who can *think* would recommend or even have some of those words in their vocabulary.

I could write a short essay on how bankrupt the above thinking is, but there comes a point where I realise I am banging my head up against what is popularly accepted, promoted by the elites.
Quoting LloydOz
{quote} Krugman may have made a decent accountant. What is conveyed here is the opposite of what any self respecting economist who can *think* would recommend or even have some of those words in their vocabulary. I could write a short essay on how bankrupt the above thinking is, but there comes a point where I realise I am banging my head up against what is popularly accepted, promoted by the elites.
I admit, credibly acting wreckless with monetary policy does seem strange. However, I've come to find a lot of what works in economics is counter-intuitive.
Self-sufficiency is the greatest of all wealth. - Epicurus
Quoting swagtrading
{quote} One interesting fact which I had come across recently was that US Auto loans market is close to $1.1Trillion, which in itself would be nearly 15th biggest economy in the world. If a meltdown or anything like that happens, it would have ramifications across the world.
Can an auto 'meltdown' even really happen? If one guy defaults on his payment, how much is it really going to drag the prices down on all other automobiles? Even if you wind up with a surplus of autos, it doesn't really hurt the general public since they're all depreciating assets anyway. It isn't like it was going up in value so you refinanced your Escalade.

Auto manufacturers could get hurt and that could drag the economy down to some extent, but even so I'm not sure how long it would last. Cars don't last very long so it seems like we'd be able to work through any glut rather quickly.
Self-sufficiency is the greatest of all wealth. - Epicurus
  • Post #29
  • Quote
  • Edited 7:32pm Nov 25, 2019 5:08pm | Edited 7:32pm
Quoting Ef5
Over the weekend I had a conversation with a very good trader friend of mine from college. He's been trading 20+ years, is very knowledgeable, and has made a fortune in the markets. During our conversation he expressed concerns to me about debt levels in the United States, particularly associated with 1.) autos loans and 2.) real estate. My initial reactions were: How bad can subprime auto-loans really be? It seems like too small of issue to have a material impact on the economy. Yes, high real estate debt could be bad if prices fall enough but how...
To address this further...

Household Debt to GDP looks good, although the GDP input can change.

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Looks like households are probably okay so let's take a look at corporate debt...


Corporate Debt to GDP is very high.
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This makes sense because interest rates are very low. If you've every taken a corporate finance class in college, you know companies seek to minimize their Weighted Average Cost of Capital (WACC) so issuing debt and buying securities makes sense. Let's take a look at this again when you factor in interest rates:
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Apparently the level of corporate debt is still very high even when you factor in interest rates. My friend might be right about there being a debt problem. If a recession hits companies are going struggle to service their debt and when equities head south companies aren't going to be able to issue stock to help pay their debt burdens.

Here's the trade
If the above scenario plays out, the optimal trade would be to short corporate debt. Even better, get long the spread between US treasuries and high yield debt. Trading the spread would basically make you market neutral when it comes to interest rate risk. This trade has overall asymmetric risk so if you're wrong you don't lose much, but stand to gain a lot if you're correct.
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One word of caution, if you're short high yield and long treasuries you're paying the difference so the carry cost is high. Don't put this trade on too soon!

Edit: Disregard the above, see post below. lol
Self-sufficiency is the greatest of all wealth. - Epicurus
Quoting Ef5
Edit: Disregard the above, see post below. lol
I actually made a dumb mistake with corporate debt and there doesn't appear to be a problem. It was simple algebra... What I was trying to show was the debt burden of companies and the equation I used was:

Debt Burden = (Debt / GDP) / Interest Rate


The problem with the above formula is as interest rates go up you'd have a decreasing debt burden which is completely backwards. For that reason, we're better off using multiplication. This formula is better:

Debt Burden = (Debt / GDP) x Interest Rate


Calculated correctly, we get this graph which doesn't indicate there's a problem.
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Self-sufficiency is the greatest of all wealth. - Epicurus
We've seen some better than expected economic data lately, namely NFP, but I'm still unconvinced of the rebound narrative playing out in the markets. My primary concern is still labor, next week we'll get JOLTS and I'll be watching it closely. JOLTS is one of the best leading indicators for labor so any further deterioration there would be very telling.
Self-sufficiency is the greatest of all wealth. - Epicurus
Quoting Ef5
We've seen some better than expected economic data lately, namely NFP, but I'm still unconvinced of the rebound narrative playing out in the markets. My primary concern is still labor, next week we'll get JOLTS and I'll be watching it closely. JOLTS is one of the best leading indicators for labor so any further deterioration there would be very telling.
NFP was way better than expected, but I don't think that enough consideration has been given to the impact of the GM strike ending. I was surprised by the upward revision, but remember also we are seeing the seasonal jobs coming into the reports as well.

Regardless of whether or not we can believe that recent jobs data is in fact reflective of the economy, the Fed could point to it as a strength in the US economy. There's a slight chance we could see some hawkishness from Powell in his testimony if a reporter gets him on his heels about keeping rates on hold.

I'll be interested to see the forecasts for next month's NFP report. If they come in high, there might be a set up for some disappointment.
We must learn who is gold, and who is gold plated
  • Post #33
  • Quote
  • Edited 8:32am Dec 11, 2019 7:55am | Edited 8:32am
I don't know how these figures are calculated in the US (except for this farm and non-farm thing which I am sure had or has some meaning which eludes me), but where I live you are officially employed if (and I copy and paste) -

Employed persons are defined as all persons aged 15 years and over who, during the reference week:

    1. worked for one hour or more for pay, profit, commission or payment in kind, in a job or business or on a farm (comprising employees and owner managers of incorporated or unincorporated enterprises); or
    2. worked for one hour or more without pay in a family business or on a farm (i.e. contributing family workers); or
    3. were employees who had a job but were not at work and were:

      1. away from work for less than four weeks up to the end of the reference week, or
      2. away from work for more than four weeks up to the end of the reference week and received pay for some or all of the four week period to the end of the reference week, or
      3. away from work as a standard work or shift arrangement, or
      4. on strike or locked out..


My bold. Some people may take issue at the one hour provision.And how broad is this "payment in kind" thing? That could include community service to pay off a traffic fine. Doesn't take much to use your imagination - confirmed by voluntary work being included. And we still have relatively high unemployment at 5%, possibly something to do with the highest minimum wages in the world.

Widespread evidence suggests it is closer to over 10%.

I think the GM situation would not have been an issue. I'm in two minds about how that is measured.

One other thing, our Stats folk adjust for seasonality. They get at least one aspect correct - poor things do their best I suppose.

JOLTS came in strong this week:
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I'm still thinking it peaked, but we'll see what happens next month.

At the moment not much has changed on my thinking about an upcoming recession. I was surprised to see Gold Volatility collapse over the past month, which makes me second guess the breakout.

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To me, that's the first piece of market info that would align well with continued expansion and no recession. I still need to do a lot more research on the scenario I pointed out earlier, but as I've come to find I don't have as much time with an infant at home now! lol
Self-sufficiency is the greatest of all wealth. - Epicurus
  • Post #35
  • Quote
  • Edited 11:09pm Dec 20, 2019 10:55pm | Edited 11:09pm
Quoting Ef5
JOLTS came in strong this week: {image} I'm still thinking it peaked, but we'll see what happens next month. At the moment not much has changed on my thinking about an upcoming recession. I was surprised to see Gold Volatility collapse over the past month, which makes me second guess the breakout. {image} To me, that's the first piece of market info that would align well with continued expansion and no recession. I still need to do a lot more research on the scenario I pointed out earlier, but as I've come to find I don't have as much time with...
I'll have to think about JOLTS - that sounds like a much better measure than simply "vacancies", or job advertisements, both of which are terrible figures and really meaningless.

As to gold volatility - on Nov 26 I posted on the Gold/silver thread this -
"The last time silver 10 daily implied volatility was this low was late May (when it was actually a bit lower). My calculations. Yours may differ. Just sayin'."

It was more of a trading issue. Volatility (an unusual beast) likes to revert to its average - not too high and not too low for any sustained period. Just when people start to get bored is the time to start actually watching, kinda thing. There are other similar measures calculated differently, but all correlated.

I sometimes guess. I'm quite clear about that. I'm guessing that gold and silvers volatility may return in higher prices. This may or may not be caused by anything to do with the real economy.
Quoting Fader123
{quote} Hi EF5 According to the chap that discovered the yield curve inversion in 1986 he has said that its 7/7 in the US. I believe he was looking at the 3mth -10 year curve as opposed to the 2s10s that is more commonly used. Looking at the Feds position there is talk of QE lite and that it is the expansion of the balance sheet that has got traders attention. In respect of the dollar index - its looks as though a further drop is not out of the question. This could make US equities more attractive Obviously, timing of the recession is an issue but...

Well this played out well:

Predicted drop on the dollar and likely rise in equities

https://www.tradingview.com/x/Lk3bp3eI/
Quoting LloydOz
I'll have to think about JOLTS - that sounds like a much better measure than simply "vacancies", or job advertisements, both of which are terrible figures and really meaningless.
There's a reason why it's a favored indicator by many Fed members. Although it's surprising that there's really never any impact.

Quoting Ef5
At the moment not much has changed on my thinking about an upcoming recession. I was surprised to see Gold Volatility collapse over the past month, which makes me second guess the breakout.
The day after this post gold took off. Even after the news that Phase 1 of the US-China trade deal, it's still acting like it's in rally mode.
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We must learn who is gold, and who is gold plated
The quantitative easing policy of some years ago was in response to some pretty serious issues.

What is their excuse this time? Read this and wonder. I think there is an experiment going on that might actually be quite deliberate. Because I can think of no reason. Anyone? Apparently because the world economy has "stuttered", whatever that means.

https://www.telegraph.co.uk/business...aign=DM1174156
Quoting LloydOz
The quantitative easing policy of some years ago was in response to some pretty serious issues. What is their excuse this time? Read this and wonder. I think there is an experiment going on that might actually be quite deliberate. Because I can think of no reason. Anyone? Apparently because the world economy has "stuttered", whatever that means. https://www.telegraph.co.uk/business...aign=DM1174156...
It's as if we are in an era of central bank boosting, especially with bond purchases. In 2016, many believe that there was an asset bubble popping and central banks prevented it (or delayed maybe) by injecting into the economy(ies). Some believe we might be there again. Interesting times nonetheless.
We must learn who is gold, and who is gold plated
I thought this was an interesting graph. NatGas supply is outpacing domestic (US) demand, while crude had a strong Q1 and Q4 in 2019. Also bearish for NatGas was the second warmest November on record.
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We must learn who is gold, and who is gold plated
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