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Macronomics profile picture

"It was one of those March days when the sun shines hot and the wind blows cold: when it is summer in the light, and winter in the shade." - Charles Dickens

Looking at the Pyrrhic victory for the European technocrats in Brussels thanks to the consolidation of Germany's Merkel coalition and the results of the Italian elections (which amounts to "Hunga Hunga"), and given the "regime change" put forward by many pundits thanks to the return of volatility after years of central banking repression, when it came to selecting our title analogy we reminded ourselves of the musical term "Intermezzo". In music, an intermezzo is a composition which fits between other musical or dramatic entities, such as acts of a play or movements of a larger musical work. In music history, the term has had several different usages, which fit into two general categories: the opera intermezzo and the instrumental intermezzo. In the 19th century, the intermezzo acquired another meaning: an instrumental piece which was either a movement between two others in a larger work, or a character piece which could stand on its own. As CITI's Chuck Prince said nicely in July 2007:

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing" - Chuck Prince

To some extent, early market jitters such as the ones caused by the explosion of the pig's "short-vol" house of straw amounted to an "intermezzo" we think. A larger musical work is at play and it is the evolution of the credit cycle. It is slowly and gradually turning, with macro hard data erring on the soft side recently (US durable goods orders falling 3.7% in Jan, vs. 2.0% drop expected) while consumer confidence, being soft data, printing on the strong side. When it comes to liquidity, it is being

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Macronomics profile picture
During my career I have had different roles within various banks, covering various products, from FX to High Grade Bonds. I have always been passionate about markets and particularly on Macro trends. I am currently working in different role in another company and still in contact with the credit market business.

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Comments (8)

The Nattering Naybob profile picture
Martin - Another instant classic.... appearances and what you don't see, things are not what they seem.

"acceleration seen in credit growth from small issuers aka small banks but also non-banks have been playing the game at an accelerating pace."

The smoking gun, as the disconnect, income gap and what lies beneath grow in intensity, and come a cropper sooner than most expect.

As for the intermezzo, popular to a select few epic 20th century films. At intermission (between the acts), one of my favorites... and apropos for where we are heading, I think.

“All men dream: but not equally. Those who dream by night in the dusty recesses of their minds wake up in the day to find it was vanity, but the dreamers of the day are dangerous men, for they may act their dreams with open eyes, to make it possible.” ― T.E. Lawrence
Mitch Zeitz profile picture
Great info, especially from DB. Non-mortgage debt to DPI excluding the top decile has blown past previous highs; and since the GFR, we know the percentage of renters in the US has expanded and the rent as a percentage of DPI has also increased (can't quote numbers). Likewise, healthcare costs have increased as a percentage of PCE per the above chart. So in summary, as a percentage of DPI, consumers are squeezed more than ever in terms of required spending on housing, healthcare, transportation and debt repayment costs. I'd be very interested to have a metric that takes in all of these factors concurrently for a median consumer. Possibly, we could call it the "Consumer Stretch Index". Seems like it would closely track 100 - Savings rate for median consumer.
It is telling that the average Joe/Jane are finding themselves in a unique position today where homes and stocks have gotten so disconnected from their salaries and abilities to buy them.
Macronomics profile picture
"Consumer Stretch Index", that would be a great idea Mitch! Definitely!
Salmo trutta profile picture
"The US savings rate has been falling while consumer credit has been on the rise with a significant usage of the credit card"

Dis-savings (disposable income obscured by leakages, private and government transfer payments). And ultimately, Alfred Marshall's "money paradox": the motives and advantages of spending borrowed money.

When the Miami Dolphin's starting middle linebacker asked my good friend if he should pay cash for, or buy a car "on time", my personal finance professor said that the only thing one should buy "on time" in their life is a home. And my professor became a multimillionaire, and left a scholarship fund to the university, on a teacher's salary - completely without the use of "leverage".

People have chosen to go the other extreme, spending exorbitant dollars on unnecessary items, discretionary spending, "on time" (materialism), in addition to money spent on necessities, goods and services that we cannot live without (all with lower price elasticities of demand according to Engel's law / coefficient).

The public is bombarded and duped with spamzoidian advertisements. Corporate marketers are richly rewarded to thread the commercial needle of a consumption society. Squeezed on one side, the consumer is confronted with quality, price, and quantities that have been downsized and diluted. On the other side the consumer has struggled to economize on pricing (to manage with thrift and aforethought), his purchases through product substitution and abeyance.

There is of course an investment opportunity in all of this. Ask yourself: What’s a necessary good? Then invest accordingly.
The best thing that ever happened to me was wake up in my late 20s and realize debt was as much a potential millstone as it was a potential tool for success. Cleared out all CC debt, starting maxing out retirement accounts, paid for last 2 autos with cash and keep a healthy rainy day account funded to deal with any unexpected emergency. I can only imagine the alternate reality where I never had that personal finance awakening.
johnnygbx profile picture
I think I understand better how borrowing can eventually become a problem in this fiat world: there is risk that the maintenance cost of the debt can eclipse sentiment for the asset obtained.
The Nattering Naybob profile picture
"I think I understand better how borrowing can eventually become a problem in this fiat world: there is risk that the maintenance cost of the debt can eclipse sentiment for the asset obtained."

Many forget, it is only through real activity that debt is ultimately repaid.
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