just in in-tray
What I've been thinking......
The markets have rallied a bit this week as they sigh a collect relief over the fact that Germany and France have “solved” the credit problem that is Greece. While a band-aid is being slapped on the issue, in large part to protect German and French banks, the issues of how to rectify the underlying structural deficit and debt issues of Greece remain unsolved. Add to that the emerging problems in Spain, Portugal, Hungary and the Baltic States, and it seems that there is more systemic risk on the horizon.
To me, it appears that the techtonic plates of the financial world are shifting. After the heart attack in the financial markets in 2008 and 2009, it appears that most businessmen in the Western World have reacted responsibly. How so? David Rosenberg points out that the US Corporate Sector reduced its bank loan and Commercial Paper exposure by 20% while increasing long term bond debt by 10%. He points out that the ratio of long-term debt relative to total debt has moved to 72%, which is a historical high. This means that business have not only reduced their total debt outstanding, but that they have substantially increased their liquidity as well. And Bloomberg this week noted that the companies that compose the S&P 500 now have $1.18 Trillion in cash on hand, up $518 Billion from the previous year. In sum, businesses are acting responsibly. Ironically, it is the Chinese Corporates that have gone on a massive borrowing and speculating spree, increasing their risk of a crisis in the coming years.
And US Consumers have been reacting in a similar way. Not only has the savings rate moved from less than 0% to over 4%, they are quickly paying down their debt to the banks, especially credit card debt. The Federal Reserve announced last week that Credit Card Debt (revolving debt) had dropped to $866 Billion versus $957 Billion a year earlier – a 9.5% drop. Non-revolving debt which tends to be things such as auto purchases, education loans, and the like are basically unchanged. And perversely enough, many consumers are radically dropping their debt exposure through defaulting on their mortgages. While unfortunate, especially for the banks, the simple fact is that the consumers total debt exposure is being reduced, and putting themselves into a healthier position.
While corporates and individuals have been behaving rationally and responsibly over the past two years, it has been many of the governments that have acted irrationally. Total debt in the system has increased, not decreased, and the sole reason for that is the massive budget deficits being run around the world, with Greece being the poster child. But with total debt at unsustainable levels along with budget deficits that never seem to close or have a plan to do so, implies that the next big risk in the market is going to come from the Government side (failed auctions perhaps?) rather than any dramatic collapse in a bank. The risk of bank collapses going forward ironically is simply due to the massive bank exposure to the debts of countries like Greece.
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