Fed Z1: A SEVERE Storm Warning


The Fed Z1 dropped a couple of days ago and I’ve been perusing it as I usually do, looking for anything particularly noteworthy.

What should have been all over the financial media wasn’t tough to spot.  What was difficult was finding any mention of it anywhere in that media.

Bluntly, any discussion of the problem has been absent.

Let’s quote from The Fed release:

Household debt edged down at an annual rate of 0.6 percent in the first quarter. Home mortgage debt contracted 2.3 percent, about the same as the decline in 2012. Consumer credit rose at an annual rate of 5.7 percent, slightly less than the increase in 2012.

Nonfinancial business debt rose at an annual rate of 5.3 percent in the first quarter, after a 6 percent increase in 2012. As in recent years, corporate bonds accounted for the largest increase.

State and local government debt rose at an annual rate of 1.9 percent in the first quarter, after declining slightly in 2012. Federal government debt rose at an annual rate of 10.3 percent in the first quarter of 2013 after a 10.9 percent increase last year.

That’s the “big picture.”  Consumer debt has gone exactly nowhere.  The so-called “recovery” has been carried by business debt that has grown at a rate roughly double that of economic expansion, and the government is growing debt at a rate more than triple that rate.

The “big picture” looks like this:

Note that the absolute level of debt to GDP, however, refuses to go under 350%; it has now started rising again but is entirely coming from two sectors — business credit and the Federal Government.

The problem with this paradigm is that we’re doing the same thing that led to the 2008 blowup — we’ve learned exactlynothing.  In real terms our GDP is in fact contracting by about $500 billion a quarter, after adjusting for debt expansion — that’s $2 trillion a year, more or less.

This is real purchasing power out of your pocket.

That’s not an annualized figure it’s a quarterly one.  For annualized take it to the 4th power, of course — which means we’re contracting in purchasing power adjusted for new debt at more than 10% over the last four quarters.

It gets worse.

Note that your real income, annualized and ignoring the leverage expansion (or contraction) of financial firms, took abig dump last quarter.  This is due to the non-financial business and federal government debt expansion coupled with a negative personal income change last quarter.

Meanwhile monetary inflation in real terms .vs. income looks like this:

You’re falling furhter and further behind — again.  The difference is that this time consumers are not gearing up. Whether because they can’t or simply refuse doesn’t matter in the end; what matters is that it’s not happening, which means this so-called “expansion” driven by ZIRP and deficits has a use-by date that has expired and we are now trying to evade the fact that the fish is well into the “stinks up the joint” stage.

This is all bad.  The imminent danger signals, however, are found here:

The gap between corporate equity prices and tangible assets is greater now than it was in 2007 — materially so.  Equity values are higher and tangible assets are lower.

This is not (yet) to the level of 1999/2000, but it’s getting there and we didn’t have to go that far last time to get a nasty blow-up.  All it takes is something going wrong — like, for instance, in Japan or Europe.

The non-financial leverage ratio is also warning of trouble ahead:

Again, corporate leverage is once again reaching for the sky and warns of markets being “priced for perfection.”

Since perfection is rarely achieved….

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