Author Topic: Another good paper from Koo  (Read 6907 times)

ERICOPOLY

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Re: Another good paper from Koo
« Reply #10 on: December 13, 2011, 08:43:36 AM »
Not sure what is mostly driving the deleveraging.  Bank charge offs (i.e., consumer and corporate defaults, haircuts, and reductions) play a large role, but so does corporate sector pay off of debt, capital markets debt to equity conversions, and increased savings by US consumers despite essentially zero return on their money when put into bank deposits.

Point being that both increased savings and debt reduction is occurring in the private sector.  Not true in the public sector, of course.

See the graph page 10 of JPMorgan's presentation:

Consumer deleveraging largely driven by charge-offs


http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf




ERICOPOLY

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Re: Another good paper from Koo
« Reply #11 on: December 13, 2011, 08:53:03 AM »
So are you in the non-deflation camp as a result?

Nope.

Real estate declines are hard to ignore, and that's deflation right before my eyes.


txlaw

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Re: Another good paper from Koo
« Reply #12 on: December 13, 2011, 09:11:16 AM »
Not sure what is mostly driving the deleveraging.  Bank charge offs (i.e., consumer and corporate defaults, haircuts, and reductions) play a large role, but so does corporate sector pay off of debt, capital markets debt to equity conversions, and increased savings by US consumers despite essentially zero return on their money when put into bank deposits.

Point being that both increased savings and debt reduction is occurring in the private sector.  Not true in the public sector, of course.

See the graph page 10 of JPMorgan's presentation:

Consumer deleveraging largely driven by charge-offs


http://files.shareholder.com/downloads/ONE/1550254602x0x515337/85746b44-384f-4eab-8c22-498b7d509acf/BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

Interesting presentation.  On page 9, the presentation says that about half of the reduction in the consumer debt service ratio is a result of lower interest rates and refinancing, with the rest being driven by "charge-offs and deleveraging."  I take it that deleveraging in that part of the presentation means paying off debt; otherwise, that doesn't make sense in the context of the next slide.

I suspect firm deleveraging has been driven mostly by productivity gains (both in technology and labor), paying down debt, and conversion of capital markets debt to equity either by default and reorg or by voluntary conversion.

But I don't have any data for that theory, so it's just a guess.

ERICOPOLY

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Re: Another good paper from Koo
« Reply #13 on: December 13, 2011, 11:01:18 AM »
On page 9, the presentation says that about half of the reduction in the consumer debt service ratio is a result of lower interest rates and refinancing

The cool thing is that it not only takes pressure off the debt service ratio, but it also drives the debt down at a faster pace.

25% of the loan is paid off in 11 years at 4% fixed interest rate.
16% of the loan is paid off in 11 years at 7% fixed interest rate.

Refinancing speeds up consumer deleveraging even though discretionary spending can rise at the same time. 

BargainValueHunter

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Re: Another good paper from Koo
« Reply #14 on: December 13, 2011, 01:27:53 PM »
Other than housing, I am seeing all prices go up. Some examples are

 - a roll of bathroom tissue from costco now costs $20 which cost $11 in 2004/2005
 - the minimum wage is on its way up  ( or already up even in Palin country like Alaska )
 - the price of coffee
 - price of food in restaurants ( up from 20-50% ) from 2008


Inflation in that which you want to buy...

Deflation in that which you want to sell...

(Unless you are in the market for a house which in many parts of the U.S. is a very good idea right now)
Albert Einstein called compound interest "the greatest mathematical discovery of all time".

Myth465

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Re: Another good paper from Koo
« Reply #15 on: December 13, 2011, 05:23:45 PM »
Eric you may be on to something. Perhaps a bailout of the banks was prudent, though a direct bailout of the consumer might have had a better result. Bank experiences excess earnings, and absorbs bad debts. Consumer is free from debt and is prevented from borrowing for 7-8 years.

The major issue I see is much of the growth in the last few decades was fueled by borrowing. We no longer have that fuel boost....

txlaw

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Re: Another good paper from Koo
« Reply #16 on: December 13, 2011, 05:56:03 PM »
It is interesting that one method of deleveraging the consumer, charge-offs, falls on the backs of bank shareholders, while the other method, low interest rates, falls on the backs of savers in general. 

On the other hand, if interest rates are supposed to match up with the inflation rate, and there is no inflation, then low interest rates aren't really producing that much of a subpar return for savers.  So the question is whether there is inflation or not, which is what a lot of the macro posts related to gold and QE are about.

Core inflation was last measured at 2%.  But core inflation excludes food and energy prices, I believe.  We all know that those things have gone up in price.

Question is: how much of the inflation in food and energy prices -- and commodities, in general -- is related to QE (which some characterize as printing money but which others don't), versus capital flow into commodities stirred by expectations of currency devaluation, versus anomalous events such as drought and other extreme weather, versus changes in the supply/demand fundamentals in the short term (e.g., supply disruptions in the Middle East)?

Very tough thing to figure out. 

ERICOPOLY

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Re: Another good paper from Koo
« Reply #17 on: December 13, 2011, 05:58:08 PM »
The major issue I see is much of the growth in the last few decades was fueled by borrowing. We no longer have that fuel boost....

We could get a huge lift though just getting back to natural demand growth in housing and autos.  Huge compressed spring there.