"At the beginning of the credit destruction cycle"

 

That's where Ed Dowd says we are.

Former Wall Street money manager and financial analyst Ed Dowd of PhinanceTechnologies.com warned in September we were at the “Beginning of Panic Rate Cut Cycle.”  Since that prediction, the Fed has cut interest rates three times.  Looks like Dowd called it correctly.

So, when does the panic kick in?  Dowd says, “The panic kicks in when there is some sort of banking wobble or stock market wobble, which is in the process of setting up.  Private credit is the first to show problems.  We had Tricolor Holdings (subprime auto lending bankruptcy) go poof.  We had First Brands (bankruptcy) go poof.  This is all private credit.  We have had other lenders like PrimaLend (bankruptcy) starting to go poof.  Private credit is just like subprime.  It not a very big part of the Jenga credit chain, but it’s enough to start a daisy chain of knock-on effects.  So, this is where we are, at the beginning of the credit destruction cycle.  We are seeing consumer credit card delinquencies nearing all-time highs, auto loan delinquencies and, next up, we will be seeing mortgage delinquencies.  People stop paying their credit cards first, then their auto loans and stop paying on their homes last.  As the layoffs accelerate, and we are already seeing more high-profile layoffs at Amazon, UPS and you name it, once those begin, we will be seeing higher delinquency rates.”

Dowd sees much lower prices for homes.  Dowd says, “There is a distinct problem between homes for sale and homes sold, meaning there are a lot of people wanting to sell their homes and not a lot of people buying them.  The inventory continues to grow. . .. The only way this clears is through price.  The price of homes is going lower.  We had an overbuild in multi-family housing because of the illegal immigrants.  Those deals are going sour and rolling over.  Rents are coming down. . .. It’s all slowly going the wrong way, and it will become a mainstream topic in 2026.”

In past interviews, Dowd points out there was massive fraud in the Biden Administration, especially in unemployment figures.  That, too, will all be revealed.  This is why Dowd pointed out last year that President Trump “Inherited a Turd of an Economy.”

. . .

There is much more in the 45-minute interview.

There's more at the link, and in the full video interview, which I highly recommend making time to watch at the above link, if possible.

(If you'd like to know more about the private credit market, which is at the root of many of the issues discussed above, see David Bahnsen's article "Private Credit Fault Lines" in the November 28 edition of "Thoughts From The Frontline".)

The thing is, it's not just private credit and consumer debt that are the problems, and the reasons why the "credit destruction cycle" is under way.  They're a microcosm of the national debt problem in many countries around the globe, including the USA.  Almost everyone, from individuals to households to corporations to bureaucrats to politicians, has been spending money that we don't have, behaving like drunken sailors with little or no financial discipline or sense of responsibility.  Credit has, to a large extent, replaced income in order to finance buying what we need or want.  John Mauldin points out:

In the early 2000s we were on the way to actually reducing or at least stabilizing this debt growth. The post-Cold War “peace dividend” and higher tax revenue from the 1990s tech boom, along with some small but helpful fiscal reforms, had us on the right path. But in short order we strayed from that path and fell off the cliff.

Let’s also note this is a bipartisan problem. In the period shown here, we had both Republican and Democratic presidents. Both parties controlled the House and Senate at various times. Both parties had “trifecta” periods of full control when they could have forced change. Neither did so.

The reason neither did so, in my view, is they are responding to voters and donors who, even if they say the right words about “fiscal responsibility,” don’t really want fiscal responsibility. They want their share of the action, whether it be defense contracts, welfare benefits, agricultural subsidies, free healthcare, loan guarantees or whatever. There is no significant constituency for actually making the kind of changes that would alter our debt trajectory. Just a few old curmudgeons like me.

Unfortunately, this won’t stop the changes from coming. They will come. They’ll cause a lot of pain we could have avoided. Then eventually, we’ll come out better on the other side. But getting there will be tough.

Again, more at the link.

I'm seeing very troubling echoes of the months before the last financial crisis in 2008.  In particular, I'm looking at how many banks are over-extended in supplying credit to the markets and to private credit entities.  Remember what happened after 2008?  Some countries and banks in Europe were forced to rehypothecate customer deposits in order to remain financially viable - in other words, they confiscated part of the deposits of many customers in order to pay off their bad debts.  They called it a "haircut" or a "capital levy" or any of a number of names, but the end result was the same - a lot of depositors lost a lot of money.  The best-known example is probably Cyprus, about which we wrote at the time, but it was far from alone.

Right now, I'm looking at the private credit sector and wondering how far we are from a repeat performance.  In fact, I'm wondering how much I should pull out of our savings account (which we built up to pay for medical expenses, as discussed at greater length a few months ago) and keep handy in cash, just in case . . . If banks close down for a few days or weeks, or limit withdrawals, or if a "levy" by whatever name is taken out of our deposits, it'll be useful to have enough cash on hand to keep going.

YMMV, of course.  We're told that the age of miracles has not yet passed - but I'm not sure our financial markets are miracle fodder, if you follow me.

Peter