Why This Is Unlike The Great Depression

Mark

She writes so well, orderly and well researched.

Summary

° Due to some dramatic elements, this period has been compared by many analysts to the Great Depression of the 1930s.

° There are some similarities, including a scenario where a debt supercycle reaches its later stages.

° However, there are also several key differences between now and then. Some better, some worse, but mainly just different.

Why This Is Unlike The Great Depression

WABAC

Thanks for the link Mark. Seems to me she has a hold of more of the elephant than some I've read. Maybe that's confirmation bias at work.

I am kind of surprised that she didn't get into Smoot-Hawley and current trade wars.

Crash

Didn't have to get very far into it to read this, and she's definitely onto something. "Adding onto that, we’re likely in the “popping” phase, or at least the "letting the air out" phase, of the largest global debt bubble as a percentage of GDP in world history, which is a topic that few people are discussing and is part of what made liquidity so horrendous in the markets over the past month. The economic impact of the virus, as bad as it is on its own, also laid bare the leverage that was already there.....(R)egimes almost always choose to devalue their currency and reset debt in real terms, rather than nominally let things collapse to start over, especially when the debt problem gets up to the sovereign level...This is unprecedented outside of active warfare... ....$2.0 trillion monthly.
This woman does indeed write clearly, cogently, logically, intelligently. Thanks for this. At the end, she recommends gold and silver, and foreign AND domestic companies with excellent balance sheets. This was very interesting, even though such technical analysis normally leaves me cold. She makes a convincing case!

davfor

It will be interesting to see how the bond market's "let the air out" inclination balances out with the Feds newly enlarged and fully activated pumps. I am not betting against the Fed yet.

Sven

Thank @Mark. Lots of good information to ponder.

dstone42

I think I need to read her article several times to take it all in.
She has a blog at lynalden.com

LewisBraham

If you were to evaluate a man's finances to see whether he was credit worthy or not, would you only look at his annual income or his assets as well--how much cash he had in the bank, the value of his home, the value of his brokerage account? Especially with a man who is aging wouldn't it make more sense to pay attention to his assets as opposed to just his income since his earnings power would be declining? The same goes with a blue chip company like Apple. Would you say Apple's ability to repay its debts is only based on its earnings potentional or the massive hoard of cash it has on its balance sheet. All of which is to in this constant discussion of the debt level of nations, especially aging developed superpower nations with less growth potential but immense stores of already existing wealth, why is the debt to annual GDP the primary focus? Why isn't this also part of the discussion?

Mark

You'd think, or would like to think so, but recent experience demonstrates how wrong that assumption could be. I'll try to explain.

Much like I have recently done a friend was in the process of buying a home in a state to which he wanted to move. He is retired and has none of the usual forms of income lenders look to first such as current W-2's or rents, royalties, etc.. He collects social security and can document a certain monthly income flow from his savings which would satisfy the traditional PITI (Principal + Interest + Taxes + Insurance) payment on the loan but would leave him with very little left after everyday life expenses (healthcare, food, utilities, entertainment, etc.). Doable but just barely. He owns a home free and clear in his current state of residence but lenders view that as more of a liability than an asset. Why? It's true value is unknown or at best an estimate until it is sold, assuming it is sold. Until such time that home assets must be insured, property taxes must be paid and upkeep must be maintained all of which constitute subtractions or liabilities against his income. I hope you see where I am going with this.

Lenders are only concerned with your ability to service your loan in the form of current income. It's all that seems to matter. Having an assist pile is nice in terms of credit worthiness but where's the 'income' ? They use what is called "Capacity" which measures the borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio. Lenders calculate DTI by adding together a borrower's total monthly debt payments and dividing that by the borrower's gross monthly income. More information can be found in the NOLO link below.

From NOLO - Mortgage Rules on "Ability to Repay"

At the end of February my friend thought he was sitting pretty because he could document the income flow necessary. There wasn't much wiggle room there but he felt he had an 'ace' in the hole in the form of the unsold house. One month in time has now seriously put a hurt on his assumptions. Will his house sell for what he hoped or thought? Will it even sell? Will an investment he holds cut or eliminate the income or distribution he counted on to be there? I've heard it said that if you can document an automatic monthly flow of income from your savings (e.g. retirement account) to your spending account (in whatever form that takes) and that flow is sustainable for 3-years than lenders can choose to proceed with the loan. I can't verify that at all. I also don't know what I would do if I were in his shoes.

LewisBraham

@Mark Yes, a home is an illiquid asset that is hard to value or to liquidate to pay debts. Yet looking at just that is thinking like the average person whose home is his/her largest asset. According to Brookings, "Almost three-quarters of aggregate household assets are in the form of financial assets—namely stocks and mutual funds, retirement accounts, and closely-held businesses. Real estate makes up the vast majority of nonfinancial assets."https://brookings.edu/blog/up-front/2019/06/25/six-facts-about-wealth-in-the-united-states/Since the top 20% controls 77% of America's net worth, much of their assets is not in their residence but in more liquid forms--cash, stocks, bonds, funds, etc: "In fact, the top one percent alone holds more wealth than the middle class. They owned 29 percent—or over $25 trillion—of household wealth in 2016, while the middle class owned just $18 trillion.[iii]" When Bernie Sanders talked about a 2.5% wealth tax he wasn't asking people to sell their homes to pay it.

davfor

Here is an interesting interview with Tom Barrack (Colony Capital chairman) that looks at how regulatory requirements within the Commercial Mortgage-Backed Securities (CMBS) market are connected to the current liquidity crisis in that market space. There are lots of short term interconnected temporary cash flow problems that need rapid resolution in this crisis situation. Many are unrelated to the historical (and potentially future) values of the underlying businesses and the creditworthiness of the individual borrowers confronting the problems.:

https://finance.yahoo.com/video/barrack-says-real-estate-collapse-222512472.html

LewisBraham

@davfor Also true, but commercial real estate is separate from household net worth. The question is, why is there not enough discussion regarding the "horrors" of America's federal deficit about taxing the wealth, not the income, but the wealth of those vast, mainly liquid assets owned by the richest to help pay down the debt? Why is GDP almost always the sole focus of the discussion?

Mark

@LewisBraham - I am familiar with the Brookings study and I was not trying to insinuate that one should only look at the 'home' when viewing a persons total assets. However when looking at your average everyday buyer of a home i.e. the other 80% who do not fall in the top 20% of those controlling 77% of America's net worth, it most often is their largest asset (assuming it's paid for) and they don't have large sums held in stocks, bonds, funds, etc.. They may have an equal amount compared to their other financial assets but I truly wonder how many do. Furthermore in the eyes of the lender those held assets (stocks etc.) are no more liquid than the home is unless and except for the borrower who can demonstrate "income" generated by them. "Income" is all that matters. Period. Held assets certainly adds props to a borrowers credit worthiness in the eyes of the lender but they will insist on demonstrable income sufficient to service the proposed loan. I don't see how that will ever change. If I were a loan officer how would I decide if a borrowers assertion or promise to sell off assets when/if necessary to service a loan payment is true? What will the value of those assets be when that happens, or tomorrow, or next week, or next year? To me that is as unpredictable as Forrest Gump's box of chocolates.

I hate to say it and I think it's a shame but that is the condition under which most of the other 80% operate and are required to operate. I'd be all for changes in this matter.

davfor

@LewisBraham I understand your big picture concerns about the current tax system. I was following up the nuts and bolts credit worthiness part of your initial comment and on the regulatory cash flow piece of @Mark's initial comment where he referred to a single family home loan applicant. I just extended his cash flow comment to include pressing regulatory issues currently impacting a variety of current borrowers. (I was employed in the lending world for a few decades and understand how important cash flow based regulatory requirements can be in determining lending and loan servicing outcomes. Net worth often takes a back seat. Where the next loan payment will come from needs to be clearly documented irrespective of underlying net worth.)

LewisBraham

@Mark @davfor Agreed, but the federal and state governments have-- and should have --a lot more flexibility as a borrower than the average individual or company. If the government chose to tax the net worth of the wealthiest to pay down the debt, it could. So why is there this constant focus on the debt to GDP level as if the U.S. or any developed nation state is an ordinary borrower?

davidrmoran

what LB said

https://www.collaborativefund.com/blog/who-pays-for-this/