Saturday, July 28, 2012

US Banks' Balance Sheet Repair

Tier 1 (core) Leverage Ratio for the past 12 quarters

Tier 1 (core) Capital Ratio of Top 25 Banks in USA

Tier 1 (core) Capital Ratio for the past 12 quarters

Friday, July 20, 2012

Student Loans - Crisis?

Here's the latest press release from the New York Federal Reserve:

NEW YORK – In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York today announced that student loan debt reported on consumer credit reports reached $904 billion in the first quarter of 2012, a $30 billion increase from the previous quarter.  In addition, consumer deleveraging continued to advance as overall indebtedness declined to $11.44 trillion, about $100 billion (0.9 percent) less than in the fourth quarter of 2011.  Since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293 billion, while other forms of debt fell a combined $1.53 trillion.

The New York Fed also released historical student loans figures, by quarter, dating back to the first quarter of 20031 as part of this quarter’s report.  These data show that student loan debt has substantially increased since 2003, growing $663 billion.  Outstanding student loan debt surpassed credit card debt as the second highest form of consumer debt in the second quarter of 2010.

“Student loan debt continues to grow even as consumers reduce mortgage debt and credit card balances,” said Donghoon Lee, senior economist at the New York Fed.  “It remains the only form of consumer debt to substantially increase since the peak of household debt in late 2008.”

Additionally, 90+ day delinquency rates for student loans steadily increased from 6.13 percent in the first quarter of 2003 to its current level of 8.69 percent.  They remain higher than that of mortgages, auto loans and home equity lines of credit (HELOC).2  90+ day student loan delinquencies were at their peak during the third quarter of 2010 at 9.17 percent and are the only form of those delinquencies to increase this quarter (by 0.24 percent).

Here's the latest about it from NYT

Thursday, July 19, 2012

Global Tax Revenues

Tax Revenues Excluding Social Security Contributions

Tax Revenues Including Social Security Contributions

Saturday, July 14, 2012

ECB Deposit Facility after the rate cut

At its monthly Governing Council meeting, ECB last week decided to cut the rate offered by its deposit facility by 25 basis points, bringing the rate down to 0.00%.  See ECB announcement here.  The new rate became effective this past Wednesday.

Since the new rate came into effect, we have seen some significant changes in balances of  the liquidity accounts at the ECB - see charts below.

Deposit Facility at the ECB

Current Accounts at ECB

The current accounts at ECB hold the required banking reserves and earn remuneration at the rate of .75%, and excess reserves held in that account does not earn any interest.  Till this past Tuesday, the excess reserves that banks held at the deposit facility earned 0.25%, but with the new interest rate, there is no difference between holding excess reserves at the current accounts or at the deposit facility.  In fact there has been significant outflow of excess reserves from the deposit facility (see the significant dip of the dotted blue plot in the deposit facility chart above) to the current accounts (see the significant spike of the red plot in the required reserves chart above) since the new policy came into effect.  However, total excess reserves have more or less remained the same (see the red plot in the current account chart above) - I guess may be it's the banks' way of wanting to park all their reserves in a single account, since either way they are not earning any remuneration on their excess reserves.

What's significant with ECB doing away with interest on excess reserves is that the floor on the rates of inter-bank lending has dropped to 0.0% and was definitely reflected in the benchmark European OverNight Index (EONIA) the last few days (see chart below).


Demography is destiny

... was the recent tagline of the morning briefing that Dr. Ed Yardeni sent out to his clients on June 13th. He achieved rock star following on Wall Street when he prognosticated in the late eighties that the Dow will reach 10,000 following the down-fall of communism in Europe. He argued that worldwide prosperity and peace that would follow the fall of  communism in eastern Europe would spur US equity markets to greater heights.  Oh boy! did did that come true or not. He has been known often to correlate equity market performance with demographic shifts. We are equally thrilled to refer to that piece here, for he used the  publication on demography that chief market strategist, Sailesh Radha, of IMRA developed for his firm Yardeni Research Inc. to build his narrative...   

This is what Yardeni told his clients about demography in his briefing today:

....." Demography. Demography is destiny. If so, then the future will be challenging in many countries around the world where fertility rates have dropped below the replacement rate . At the same time, people are living longer. So dependency ratios are destined to soar.

Why have fertility rates fallen around the world? There are a few plausible explanations. One of them stands out, in my opinion: Socialism may breed infertility! In the past, people relied on their children to support them in their old age. Your children were your old-age insurance policy. Over the past few decades, people have come to depend increasingly on social security provided by their governments. So they are having fewer kids.

That’s fine as long as the ratio of retirees to workers isn't so high that the burden of supporting our senior citizens crushes any incentive to work resulting from excessively high tax rates. The cost of increasingly generous and excessive entitlements has been soaring relative to taxable earned incomes even before dependency ratios are set to rise in many countries. Governments have chosen to borrow to finance social security and other entitlements, to avoid burdening workers with the extremely high tax rates that are necessary to balance entitlement-bloated budgets.

Bond markets may be starting to shut down for countries that have accumulated too much debt. That’s creating a Debt Trap for debt-challenged governments. If they slash their spending and raise their tax rates, economic growth will tend to slow. If tax revenues fall faster than spending, their budget deficits will widen. There has recently been an outcry about the hopelessness of such “austerian” policies that perversely lead to higher, rather than lower, debt-to-GDP ratios. Let’s examine some of the relevant demographic developments around the world:

(1) Median ages are highest in advanced economies with large social welfare states. The UN compiles all sorts of demographic data. Among the most interesting are median ages for the countries of the world. I asked Sailesh Radha, our consultant, to collect the data. He did so for 45 countries for 2010. Japan has the highest median age (44.7), while the Philippines has the lowest (22.2). Advanced economies tend to have higher median ages than emerging ones because they provide more social welfare, which boosts longevity and depresses fertility.

(2) China is aging quickly. Among emerging economies, China has one of the highest median ages at 34.5, up from a low of 19.7 during 1970 (Fig. 10). The country’s fertility rate plunged from a high of 5.9 births per woman during 1966 to a replacement rate of 2.1 during 1992. It has been below this rate ever since then, falling to a record low of 1.6 during 2009.

The UN’s population projections show that the cohort of 15- to 24-year-olds rose from 98 million in 1950 to a peak of 249.8 million during 1990. It is projected to fall back down to 124.2 million by 2050. Of course, China’s demographic profile is a consequence of the one-child policy imposed by the government during 1979. Now anecdotal evidence suggests that China’s labor force growth is already slowing along with the supply of new entrants. This is why the country’s growth rate is slowing.

(3) Europe is old and infertile. The median age in Germany was 44.3 in 2010. It was 43.2 in Italy, 40.1 in Spain, 39.9 in France, and 39.8 in the UK. UN population projections show a plunge in the 15- to 24-year-old age group exceeding 20 million over the next two decades in Europe. That’s because fertility rates dropped below the replacement rate in most European countries during the late 1970s and early 1980s."...

Thursday, July 12, 2012

Risk-on or Risk-off

The chart below plots the ratio of Morgan Stanley Cyclical Index (CYC) to Morgan Stanley Consumer Index (CMR).

Ratio of Cyclical Index to Consumer Index

The direction of this ratio tells us what the markets expect for the US economy.  Since the ratio peaked on March 15, it has been trending down, implying that cycle resistant consumer staples sector has gained prominence over the cyclical sector since then.  The relationship between these two sectors also reveals the consumer sentiment and the  Risk-on or Risk-off sentiment of the market.  Markets rotating out of  the cyclical sector into consumer sector or vice versa (as divulged by the direction from which the green ratio line on the chart cuts its 200-day moving average) foretells the direction of the economy in the immediate future.

Wednesday, July 11, 2012

Size of Europe's Banking Sector

A brief graphical summary of the size of the banking sector of  major Euro zone countries - it's good to know the size of the monster the financial world is grappling with.

Size of Eurozone  Banking Sector

Size of Banking Sector in Eurozone as Ratio of GDP  

Size of Capital & Reserves of Eurozone Banking Sector