How's That Deleveraging Coming Along?

Includes: DIA, KBE, KRE, QQQ, SPY, XLF
by: Cullen Roche

Blogging is hard. Don’t let economists tell you otherwise. I loved James Montier’s note a few weeks ago on economics bloggers. I certainly echo his opinions and take it even one step further. The most interesting thing about the financial blogosphere is that it is unlike any other part of the web. Some of the absolutest brightest people in the world of economics and finance write blogs or at least write weekly or daily letters that are in essence, some form of blog (what differentiates a blog from a regular old website is a mystery to me as they all seem to be some form of the other these days).

The best part about the financial blogosphere is that it is not filled with a bunch of Perez Hilton wannabes who sit around in their underwear writing nonsense or voicing their opinions so they can hear the sound of their own voice. You can access Nobel prize winners, PhDs, prestigious professors, superb analysts, etc. You can obtain access to usually inaccessible people through the internet. The financial blogosphere has, in my opinion, become the most vital source of information and honest opinion available to the investment public. I read a mountain of sell side research every day (mostly for a fee), but I also filter 20-30 blogs on a daily basis that provide as good, if not better research than any Wall Street firm or hedge fund. And the best part about the blogs is that they are entirely free of charge. For a place that is known for its fee structures (Wall Street) this is about as good as it gets.

Speaking of economics – how is the de-leveraging of American households coming along? We’re certainly making progress, however, we’re coming off an extraordinary mountain of debt. According to data from the Fed, the Financial Obligations Ratio remains above historically high levels. It’s no wonder that consumers seem to have never fully recovered from the Great Recession. If mean reversion plays its usual role here we’re likely in for several more quarters (if not years) of consumer deleveraging.


There are a few macro trends that I believe were the cause of this financial crisis and the most glaring is the gross expansion of the financial sector. The worst crime in this multi-decade trend was the movement of skilled workers into this sector. And these weren’t just regular old workers. For the most part they were our best and brightest – many of our best thinkers and most talented sales people. The financial sector, an industry that doesn’t really create anything, has become a place where the best and brightest congregate in order to figure out how they can best transfer money out of Joe Schmos pockets and into Bank A’s pockets.

I am probably downplaying the value of banks and financial institutions to the overall economy, but I am sincerely frustrated at the Japanese response we have taken to this crisis. I have long maintained that the financial crisis was the markets way of telling us that this industry was too large and too unproductive – that resources were being wasted in this largely unproductive industry. The credit crisis was the market trying to impose its will on this sector and right the laws of economics. Then comes the government. This industry might be our largest hurdle coming out of the Great Recession. And if it explodes back to its previous health I have a feeling the markets will once again impose their will on this sector at some point in the future – read, future bank crisis. I believe we’ve truly wasted a good crisis.