Archive for May 31, 2017

Americans Start Borrowing Again

Debt can be a scary concept, although if you spend time with economists they’re certainly generally a little more accepting.  Financial shocks though tend to make people much more wary and over the last decade Americans have severely reduced the levels of debt they incur.

That’s seems to be changing, there are many signs that with memories of the recession fading they are starting to borrow again.  The numbers in the US are as always somewhat frightening, US consumers now owe nearly $13 trillion on things like mortgages, loans and credit cards.  The number is large and in fact exceeds the total that preceded the last financial meltdown.

Our economists look at increased borrowing as a sign of economic growth, of a confident financial future and there is some merit in that opinion.  Yet consumer debt can quickly change from being a positive economic indicator to being deemed unsustainable just as before the housing crash.

Debt at a push can be seen as a short term indicator of a recover but it’s not something to build a healthy economy on. You can see the change on US mainstream TV, consumerism and credit is growing.  Check out the adverts and feelings on local stations, international viewers can buy a US proxy to view the channels online.

Debt undoubtedly is not something which you want in the long term, healthy economies are rarely built on high levels of debt. One of the issues is the lack of stability, you might think a certain level of debt is manageable but if interest rates rise or economic circumstances alter that might change very quickly indeed.

One of the best ways to assess debt is to consider what it has been incurred for.  Credit card debt built up simply on consumerism might boost short term economic indicators but the benefits are short lived.  Mortgages and things like student loans are perhaps more positive, with people actively improving their lives.

This doesn’t mean they are safe either though, as we saw with the mortgage crisis in the US which precipitated the financial crash. This time it is perhaps student loans which are the worry for the US economy.  US students have risen markedly as college costs have gone up and now stands at an amazing $1.34 trillion. What’s more, over 10% of that is more than 90 days past due – a rate that has almost doubled in the last decade.

Debt is safest when you have a stable job and a decent income, but many factors can alter this very quickly. Job loss, economic changes or something like ill health can cause chaos to even a high earner who has high levels of debt.  It doesn’t have to be something this dramatic, interest rates are starting to rise and this can increase the cost of servicing debt very quickly.

Consumers may get use to maintaining high levels of debt to purchase cars, own bigger homes, electronic goods, US Netflix subscriptions and other luxuries yet if these are bought on credit there could be problems in the future.

Safe from ‘Frexit’ but is Italy Next?

You can almost hear the huge Eurozone sigh of relief as the possibilities of Frexit seem to be diminishing.  The reason is of course, the predicted outcome of the French Presidential elections with most polls suggesting Emmanuel Macron is almost certain to win.  Of course it would be foolish to completely rule out Marine Le Pen, it wouldn’t take much to swing opinion towards the anti-euro party.  Many French voters dislike both candidates which is normally a recipe for a shock.

The next big Euro worry is likely to be from Italy where anti-Euro sentiment is much stronger that France.  Italy has also suffered more than most in the recent financial storms, look at the performance of the various Euro-bonds and you’ll find that Italy’s are among the very worst performing out of all the Eurozone countries.

Take for example an Italian 10 year old bond yield and compare it with a German equivalent and you’ll see a huge spread in the relative values. The Italian bond is rated significantly lower in value than the German ones which represent the political and economic risk the country faces.

This situation is made worse by the potential result in the forthcoming Italian election.  Dubbed by many to be the most dangerous event in Europe, the markets are scared that Italy could vote to leave the Eurozone.  The ant-Euro party, 5-Star are now the highest rated party in Italian opinion polls.  You can see the sort of populist support by merely watching Italian TV for a few hours, try the method in this post entitled – RAI Streaming esturo for a cross section.

They are not alone in Italy many of the other Eurosceptic parties are also doing well which doesn’t bode well if any referendum was help.  It is widely believed that if there was an election in Italy now – the 5 Star party would almost certainly win.

Would this create the ‘QuItaly’ situation that European leaders dread is difficult to guess?  There is no doubt that political populism is on the rise in many European countries and Italy is simply one of many.  There is also the feeling that the Italians are much less pro-Euro than the French.

Even without this actually happening, the political and financial damage of uncertainty is bound to effect the markets.  Italian debt is being downgraded which further decreases the value of Government bonds.  The ultimate effect is that the huge Italian debt becomes more and more expensive to service.

John Francisco