Some weeks seem to be inundated with charts and data, while weeks like this one seem to be nothing more than a continuation of the same data from the previous month. Rather than analyze duplicative charts, we scoured through the all of the newsletters and blog posts and data we could find and wanted give these 2 charts their own spotlight.
This first chart details total non-performing corporate loans of JP Morgan Chase, Bank of America and Wells Fargo…
According to the data, JP Morgan’s delinquent corporate loans are up 50% to $2.2 billion, while Bank of America’s are up 32% to $1.6 billion and Wells Fargo’s are up 64% to $3.97 billion.
This data is important because it speaks miles about the business climate in the US right now. For years corporations have relied on stock buybacks to hit their earnings targets, and with interest rates slowly creeping that option may not be in the playbook much longer. Just by looking at the non-performing loans in Q1, that says to us that revenue is down and financial obligations are becoming more difficult to meet. In order to meet them, businesses will either need to raise cash, raise revenue (sell more stuff), scale back on PPE (property plant and equipment), or scale back on human capital (fire people). Energy producers are starting to feel the pressures of mounting debt obligations, coupled with falling oil prices. This has led to ratings agencies downgrading the debt of oil producing companies, which has in turn hurt share prices.
Any way you cut it, a sharp rise in corporate non-performing loans is a serious economic red flag that deserves our attention.
The second chart shows the total credit market debt owed in the US (a depiction of all debt owed in the US today from John Doe on Main Street to Exxon corporate debt to the US Government) compared to US nominal GDP…
Typically, debt and GDP should grow at a fairly standard rate, the theory being that the more productive your economy is, the higher of a debt burden one can manage. From a micro perspective, there are a few problems I have with this chart, but from a macro perspective the point it makes is clear: too much debt at some point becomes unsustainable, to which we agree.
However, this chart does not factor in the appeal of debt in a low interest rate environment, the growth over the last 2 decades in student loans, and many other factors that are unique to the 21st century.
Another point to remember is that debt in and of itself is not a bad thing, it is ones inability to repay that debt that has severe implications. To see what happens when a large segment of a population cannot repay their debts, look no further than the Global Financial Crisis of 2008-2009. That is why the ever-growing US national debt does not bother me…yet; if rates in the secondary market were to go from a theoretical 3%-6% on 30 year treasury bonds, the US government could buy back their own debt and retire it at half price, a practice known as bond defeasance.
Unfortunately, John and Jane Doe are not in the same boat as the US government, and when citizens overextend themselves, they will eventually wind up with a financial hangover when the party comes to an end.
Thank you for reading and be sure to check our website weekly for the Charts of the Week and our weekly podcast.