There is some interesting data on the deleveraging that is occurring with the American household. Since the peak in Q3 of 2008, US households have lowered their outstanding debt by $1.3 trillion. It is important to understand how this deleveraging is occurring. First of all, Americans are largely paying down existing debts much faster and are no longer on a debt binge like they were pre-2007. Yet a significant amount of the deleveraging has occurred via mortgage defaults. So while lower debt is a good sign, it is important to understand in what context this is occurring. Another point that will be highlighted is the amount of student loan borrowing in the US household equation. This segment of debt was untouched by the recession as younger Americans financed their college educations through more expensive debt. After a few years, Americans have pushed off some $1.3 trillion in household debt. Let us examine how this debt weight was lost. Removing $1.3 trillion in household debt Without question most of this reduction in debt has occurred because of mortgages being written off thanks to the housing bubble popping. Yet another part of the equation is that Americans have tapered off their borrowing ways and are not back to pre-recession levels . It is likely that this is a structural change given that most of the previous decade’s borrowing came courtesy of a once in a lifetime bubble. Let us examine how this debt was removed via the housing process: The big increase in US household debt from 2000 onwards was largely based on massive growth of mortgage debt. In 2000 outstanding mortgage debt went up nearly $600 billion. It dropped a bit in 2001 likely in line with the tech bubble bursting. After that, it was bubble city yet again. In 2002 it was well over $600 billion. From 2003 to 2005 it ranged in the $800 to $900 billion category. In 2006 it went over the nutty $1 trillion mark and even in 2007 it was over $900 billion. Trillions of dollars added in mortgage debt thanks to the housing bubble. To be exact, a stunning $6.2 trillion in mortgage debt was added between 2000 and 2008. Yet in 2008 even with problems emerging net mortgage debt went up. Only in 2009 through 2011 did we see actual mortgage debt go down. $241 billion in mortgage debt was paid down and as you can see from the chart above, a large amount of mortgage debt went away because of the housing bubble bust . All in all $968 billion in mortgage debt has been written off from 2009 to 2011. Underlying all of this of course is that banks have dealt much better from the bust since the Federal Reserve has helped banks directly with countless programs and bailouts. For example, home values are down over 30 percent from their peak. However banks have not come close to adjusting mortgage debt by 30 percent. Even the chart above reflects this trend and demonstrates that most of the deleveraging has occurred on the balance sheets of US households. Part of this has come from lower mortgage rates as well. U.S. mortgage rates are down from August , touching 3.77 percent APR for a 30 year fixed mortgage The growing student debt While practically all areas of consumer debt fell once the recession hit, student loan borrowing continued unabated: While the bubble in housing clearly has caused massive deleveraging in household debt, the higher education bubble continues to rage on. You have mixed signals being thrown out to students that yes, education is going to make you more money in the long-run but this kind of generalist advice provides very little guidance. There is a big difference between what career you choose and also where you go to study. It is insane that some poor quality institutions are charging students $50,000 per year and the only way this can occur is via the student loan system. Think about the fact that US households are essentially earning what they did in 1995 yet the cost of going to college has gone up even quicker than housing did during the peak of the bubble. While it is true that US households are in the painful process of deleveraging, banks are once again levering up and speculating in all sorts of markets. The Federal Reserve is essentially handing out free money to member banks so they can continue to speculate in whatever they see fit. Of course the unforeseen changes are coming via hidden inflation and a declining standard of living. Need we remind you that the Fed was largely at the core of the initial housing bubble? With no real changes to the financial system the Fed is essentially funneling billions of dollars each month into the housing market to try and re-inflate asset values. US households have a firm grasp on what is happening with over 46.5 million Americans on food stamps and nearly
2013 Earnings Are Now Forecast To Be Less Then 2009 Earnings Were Projected To Be In 2007 Submitted by Tyler Durden on 02/09/2013 12:51 -0500 Ben Bernanke Bob Pisani Central Banks Excess Reserves Reality Over the past few weeks, virtually all of the empty chatterboxes on financial comedy TV have been repeating ad infinitum just how much cheaper the market now is compared to its prior peak in 2007 because, get this, it trades at "only" a 15x multiple compared to the 18x or so reached at its peak in 2007. By doing so these same hollow pundits simply confirm just how painfully clueless their cheerleading is, as the market, or what's left of it in the " new Bernanke centrally-planned abnormal ", never trades on current earnings but always future discounted EPS, or in other words, forward P/E, or any other valuation, multiples. And it is when one looks at the future on an apples to apples basis, that the market now is more expensive than it was back in 2007! As the chart below shows, specifically the red dotted line, the 2013 SP 500 consensus earnings, which have obviously been declining for the past year from 120 to roughly 110, are now less than what 2009 consensus earnings were at the peak of the market in 2007, when they, too, hit some 120 in Earnings per share. In other words, on a forward multiple basis, in 2007 the market was cheaper than it is now as earnings were supposed to go up virtually parabolically, from under 90 for year end 2007 to 108 for 2008 and 120 for 2009. Just as notable is the full year 2012 earnings which too were supposed to soar to nearly 120 as recently as 2010, instead closed at the very lowest of the forward projection series, or just about 100 in SP500 EPS. Putting this number in historical perspective as the blue line shows, back in 2007 the Wall Street consensus was expecting that 2008 earnings would be higher than where 2012 actual earnings will close the year. Of course, what ended up happening was vastly different, and both 2008 and 2009 actual earnings imploded from their peak estimates of 110 and 120 to approximately 65 and 60, or were literally cut in half as the Great Financial Crisis destroyed not only the corporate bottom line but all hopes of multiple expansion. And now we are back to forecasting a massive growth in the future, which as history has shown time and again, ir rarely if ever attained. But that is what the sell-side lemming crew is taught to do: draw upward sloping arrows and goalseek their models to fit an artificial regression line. Yet what the second chart below shows is that when one normalizes for the recent historical pattern in earnings, the consensus 2013 earnings forecast will once again be a major disappointment, and will end up being drastically reduced. In fact, if one extrapolates the inverted curved yellow line of what actual SP earnings have been in recent years, it is very likely that not only has the broader economy peaked, but so have corporate revenues, margins and earnings, and at this point any profit growth will be very limited at best. Finally, slamming the door shut on the future hope versus current reality myth, Goldman's latest Q4 earnings tally reminds us that with over 80% of Q4 earnings season done, EPS is now expected to decline by 1% relative to Q4 2011, (when Europe was imploding (as usual), and when the global central banks had to bailout the world once more). Some other observations: Trailing four-quarter margins declined in almost every sector . Index-level margins look stronger excluding charges but are still below last year’s peak. Management guidance for 1Q 2013 is more negative than us ual. 78% of companies guided down versus consensus estimates (versus 68% historically). Full-year margins fell by 30 bp versus last year with declines in almost every sector. The largest margin declines came from Telecom Services, Energy, and Materials. While Information Technology margins declined by 46 bp versus 2011, 8% sales growth resulted in relatively strong earnings growth of 5%. Bottom-up consensus expected 2012 EPS of $107 one year ago . This is 5% higher than realized results comparable to those estimates. A -5% revision is in-line with the median historical revision since 1984 Bottom-up consensus forecasts $112 of EPS for 2013. Consensus already lowered estimates by 1% in 2013 with the largest declines in Health Care and Information Technology earnings estimates. Who performed best? Why the one group benefitting most from trillions in excess reserves, and which is full to the gills of fake earnings like one-time items, non-recurring non-cash charges, and of course: loan-loss reserve releases rarely if ever matched by the need to raise provisions for the coming avalanche of lawsuits against all banks: The Financials sector reported the strongest year-over-year growth in 2012. Financials EPS grew 7% versus 2011 Finally, for that most trotted out metric that companies are "beating expectations" - here's why: since the start of earnings season in January, consensus Q4 earnings have declined by a massive 8% in just a few weeks ! Why of course companies will beat consensus EPS numbers that were some 8% higher just one month ago. The reality is that in order for companies to "beat" estimates, the consolidated Q4 EPS for the SP500 has had to drop from $25.51 to $23.47, which as already noted means a 1% drop in Y/Y Q4 earnings , and which means that contrary to what Bob Pisani may tell you, this earnings season will be the weakest in all of 2012, with little real hope for a pick up in 2013. Average: 4.857145 Your rating: None Average: 4.9 ( 7 votes) Tweet - advertisements - Login or register to post comments 5994 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Bill Gross Proven Half Right (For Now): Fed's Kocherlakota Just Reduced His 2011 GDP Forecast From 3.0% To 2.5%
Why Energy May Be Abundant But Not Cheap Submitted by Tyler Durden on 10/29/2012 17:41 -0400 Afghanistan China Copper CRAP ETC Guest Post Natural Gas Recession recovery Saudi Arabia Submitted by Charles Hugh-Smith of OfTwoMinds blog , It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy. Many people think “peak oil” is about the world is “running out of oil." Actually, “peak oil” is about the world running out of cheap, easy-to-get oil. That means fossil fuels might be abundant (supply exceeds demand) for a time but still remain expensive. The abundance or scarcity of energy is only one factor in its price. As the cost of extraction, transport, refining, and taxes rise, so does the “cost basis” or the total cost of production from the field to the pump. Anyone selling oil below its cost basis will lose money and go out of business. We are trained to expect that anything that is abundant will be cheap, but energy is a special case: it can be abundant but costly, because it’s become costly to produce. EROEI (energy returned on energy invested) helps illuminate this point. In the good old days, one barrel of oil invested might yield 100 barrels of oil extracted and refined for delivery. Now it takes one barrel of oil to extract and refine 5 barrels of oil, or perhaps as little as 3 barrels of unconventional or deep sea oil. In the old days, oil would shoot out of the ground once a hole was drilled down to the deposit. All the easy-to-find, easy-to-get oil has been consumed; now even Saudi Arabia must pump millions of gallons of water into its wells to push the oil up out of the ground. Recent discoveries of oil are in costly locales deep offshore or in extreme conditions. It takes billions of dollars to erect the platforms and wells to reach the oil, so the cost basis of this new oil is high. It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy. High energy costs mean households must spend more of their income on energy, leaving less for savings and consumption. High energy costs act as a hidden “tax” on the economy, raising the price of everything that uses energy. As household incomes drop and vehicles become more efficient, demand for gasoline declines. Normally, we would expect lower demand to lead to lower prices. But since the production costs of oil have risen, there is a “floor” for the price of gasoline. As EROEI drops, the price floor rises, regardless of demand. This decrease in real incomes and ratcheting-higher energy costs could lead to a situation where energy is abundant but few can afford to buy much of it. The relative abundance of fracked natural gas and low-energy density fossil fuels like tar sands and shale has led to a media frenzy that confuses abundance with low cost. This article (via correspondent Steve K.) illustrates the tone and breezy selection of data to back up the "no worries, Mate" forecast of abundant cheap liquid fuels: An economy awash in oil . (MacLeans) Not so fast, reports Rex Weyler of the Deep Green Blog . Here is Rex's response to the above article. Fair point about the volume of unconventional – deepwater, shale gas oil, tar sands, etc. – hydrocarbons. These reserves may even produce peakies and/or sustain the plateau longer than some observers believe. However, biophysical restraints remain real; peak oil remains real; peak net energy appears imminent, and the impact on economies is already being felt globally. Points to consider: The dregs: In spite of huge shale tar reserve discoveries, peak discoveries remain well behind us, in the 1960s. My father, a petroleum geologist his entire life (and still, in Houston, Kazakstan...), knew about shale and tar deposits when I was a teenager in the 1960s. He called them "the dregs." These deposits are not really news within the oil industry. And they are the dregs because of high cost, low EROI and rapid depletion. EROI: The volume of these low-net-energy reserves could extend peak oil production for decades, but at fast-declining net energy returned to society. We high-graded Earth’s hydrocarbons, just as we high-graded the forests, fish, copper, tin, water, and so forth. We’ve taken the best, highest EROI hydrocarbons, the 100:1 free-flowing wells of the 1930s and 40s. We’re now into the 3:1 and 2:1 tar sands. For example: damming rivers in Northern BC, to send electricity to the fracking fields, to send shale gas to Alberta, to cook the boreal substrate, and mix the black sludge with gas condensate shipped in from California and by pipeline from Kitimat to Fort McMurray, to mix with the bitumen, to pipe to Vancouver Harbour, to ship to China, to burn in a power plant, to supply electricity to their manufacturing empire. By the time any of this energy gets used to actually make something useful to someone in society, and by the time that user puts that usefulness to work to feed, clothe, house, or heal anyone, there is no net-energy left. Our food in North America is already negative net energy by1:10 at best, up to 1:17 or worse for much of the crap we eat. This matters. EROI at well-head, EROI at the consumer pump, and EROI at the point of society’s actual service all matter. Well-head EROI, counting all public subsidies, is now in the 5:1 to 1:1 range for all these “non-conventional” (meaning the dregs) hydrocarbon deposits. Money can be made. Some energy can be delivered to Society, but this is already way below the well-head EROI that could likely run the current complexity of the human society, much less “grow” economies. The degrading reserves take us down along the EROI curve, in which Net Energy returned to society falls off a cliff around 6:1, and is in freefall by 3:1. Net-energy alone kills the idea of much economic growth from a booming hydrocarbon bonanza (other than some great stock plays along the way). Furthermore, depletion renders the idea ever more unlikely: Depletion: Depletion rates on these gas fields have arrived quickly and appear drastic by historic industry standards. The fracking fields peak early and decline swiftly. In the Bakken shale field – one of the great North American saviour fields – the average well has produced ~ 85k barrels in its first year and then declined at about 40% per year. The newer average wells peak earlier and decline faster, so the overall trend is down. The depletion moves the production process along a function that approaches zero net energy... Down we go along the EROI curve... 5:1 .. 4:1 .. 3 .. 2 ... and then really complex society breaks down. An Amish farmer gets 10:1. The Bakken break-even oil price is $85, so there is no profit in any of this right now, but of course there will be if global depletion exceeds demand from crashing economies. Depletion – both in volume and quality – and depletion for all industrial materials and energy stores, EROI, and economic stagnation all work as feedback loops. No one knows the bifurcation points in this complex system. We try to predict those, but miss by a longshot sometimes. Complex societies crash in this manner, declining returns on investments in complexity, from Babylon to London and Washington. See J. Tainter, H. Odum, N. Georgescu-Roegen, Hall, Cleveland, et al. Here are some depletion data on The Oil Drum: Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”? . See A Review of the Past and Current State of EROI Data (PDF) by Hall, Cleveland, et al. (source: www.mdpi.com ) There is a lot of EROI data here: Obstacles Facing US Wind Energy . (The Oil Drum) Below is the EROI curve, only the “We are here” point at 10:1 is the modern average, and from a few years ago. The new conventional stuff is coming in lower and and the enhanced recovery, shale and tar fields are already over the falls at 6 or 5:1 for the better stuff (best dregs), and 3:1 to 1:1 for the dregs of the dregs, the deeper shale and tar sands. So yes, our friends are correct about the great volume of tar, shale, deep, heavy hydrocarbons, but increasing production of world liquid hydrocarbons much beyond the current 85mb/d is not likely, and increasing net production is even less likely. As you may know, net production per capita peaked in 1979. Actual net production is peaking now. This is the figure that counts: Actual current Net Production Delivered to Society. Growing this figure is technically possible, and may happen with some massive production bonanzas, i.e. we may see actual production push above 90mb/day, or higher, and may even see net production increase, but a major glut of hydrocarbons? No. Not remotely. When settlers first came to North America, they found copper nuggets the size of horses exposed in river beds. China just bought the best known, last, huge, moderate-to-low-grade, strip-minable, high-cost copper field in the world, in Afghanistan, for $billions over the western bids. There will be others, but rest assured: They will be lower grade, higher cost, and the competition will be more intense. When was the last time you bought a “copper” fitting at the hardware store. They’re crap. The alloys are crap. Because the ore quality is in decline and the costs of extraction are rising. Same with oil, trees, tin, coal.... Make no mistake: The war for the dwindling materials and energy flow is well underway. Thank you, Rex, for this commentary on EROI and the quality and cost of hydrocarbon resources. Complex systems like economies are nonlinear, and so history does not necessarily track linear extrapolations of present trends. With that caveat in mind, the preponderance of evidence supports the notion that fossil fuel energy may remain abundant in the sense that supply meets or exceeds demand in a global recession, but the price of liquid fuels may remain high enough to create a drag on growth, employment, tax revenues and all the other economic metrics impacted by high energy costs. Average: 3.8 Your rating: None Average: 3.8 ( 10 votes) Tweet Login or register to post comments 4924 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: What Peak Oil? Who Wants The Highest Crude Oil Price? Presenting The OPEC Cost Curve Guest Post: The Scientific Challenges To Replacing Oil With Renewables The 'Green' Premium: 620% The Race For BTU Has Begun
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