With the total balance of auto loans for new and used vehicles approaching $1 trillion in the U.S., the folks at Experian want you to know that no matter what the numbers say, there’s no speculative bubble forming in the industry. Just ask Melinda Zabritski, the group’s director of automotive finance, who is quick to dismiss the growing chorus of Chicken Littles who are concerned about subprime auto lending:

Whenever there is an uptick in the number of loans to subprime and deep subprime customers, there is the potential for a 'sky is falling' type of reaction, [but] the reality is we are looking at a remarkably stable automotive-loan market, in part because consumers are continuing to stay on top of their payments.

That would be great if it were true. Of course the reality is that, according to the NY Times, early delinquencies (i.e. borrowers who have missed a payment within 8 months of origination) are at their highest level since 2008:

More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008 [and] more than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November [also] the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.

Combine that with the fact that the percentage of total auto loan originations made to subprime borrowers surged to 27% in 2013 (the highest level since 2006), the same year that 1.1 million U.S. households took out auto title loans (i.e. the new home equity loan), and you’ve got a rather strong argument for the contention that anything we learned in 2008 about the perils of loose lending standards has now been completely forgotten.

Reinforcing this point is Wells Fargo, who notes that things are now officially back to “normal,” where “normal” is amusingly defined by the conditions that prevailed in 2006:

Lending standards for households and corporations have eased to the extent that they resemble the last “normal” period of lending seen in 2006. Credit has expanded rapidly in some loan categories, which has in turn boosted spending and investment.

Of course the bad news is that Americans are again overextended at just the wrong time:

...should interest rates rise later this year, some households and corporations may find themselves overleveraged as interest rates and borrowing costs rise. When looking at interest rate sensitivity by loan product, we see that auto loans rates are the most sensitive to changes in the fed funds target rate. In addition, we can see that for each one-percentage point rise in the fed funds rate, the interest rate on a 48-month new car loan rises 0.61 percentage points.

The prudent thing to do, from a lender’s perspective, is to tighten standards when it appears borrowers are exhibiting a propensity to take on an undue amount of risk. Instead, standards are actually falling as risk-taking increases:

Although firms continue to ease lending standards, they have perceived increased risk among some loan types.

And, not surprisingly, recklessness is most prevalent in the two categories that have combined to underpin consumer credit growth post-crisis:

Among retail loans, student and auto loans saw the largest increase in 2014, as more than 40 percent of firms reported increased risk.

Most disturbing of all, lenders seem to have reverted to their pre-crisis mindset: “If we can sell the loan, who cares about the creditworthiness of the borrower?”

In 2014, a third of all firms originated retail loans with the intent to sell or hold the loan (as opposed to the sole intention to hold the loan). This trend indicates that some firms could be extending loans that they consider less creditworthy and could be eager to get these higher-risk loans off of their balance sheets.

As a reminder, ABS issuance hit its highest level since the crisis last year with student and auto loans accounting for the lion’s share. That's no coincidence.

16 Facts 

The Tremendous Financial Devastation That We Are Seeing All Over The World

The Euro Crisis

Europeans Rush to Gold Coins as Bank of Greece Stops Sales

Following the much-celebrated (and massive 13% swing low-to-high) bounce yesterday at the hands of a desperate PBOC, the morning session ended with an early boost fading. Shanghai margin debt has now suffered the longest streak of declines in 3 years and as BofAML warned they "doubt that this marks the end of the de-leveraging process in the stock market given that much of the leveraged positions are yet to unwind."

With both Manufacturing and Services PMIs printing above 50, stimulus is now clearly aimed at maintaining the bubble but as BofAML concludes, "after this adverse experience, we expect many investors will be much more cautious before investing into the stock market, we will be surprised to see a return of the unbridled enthusiasm of investors any time soon."

• SHANGHAI MARGIN DEBT HAS LONGEST STRETCH OF DECLINES IN 3 YEAR

Not the follow through everyone was hoping and praying for after Greece defaulted...

To summarize:

We doubt that this marks the end of the de-leveraging process in the stock market given that much of the leveraged positions are yet to unwind. We believe that the chance is high that we have seen the peak of this round of the rally in the A-share market.

We suspect that the government will be less blatant in urging investors to buy stocks going forward after seeing the potential damage that a leverage-fueled market can do.

After this adverse experience, we expect many investors will be much more cautious before investing into the stock market, using leverage.

The air had probably been let out of the balloon and we will be surprised to see a return of the unbridled enthusiasm of investors any time soon.

...

In our view, the selling pressure so far has mainly come from stock-related borrowings via various unofficial channels where the leverage is much higher. Besides, sentiment also plays a decisive role - if many leveraged buyers believe that the bull market is over, they may be inclined to sell due to the high interest cost burden.

Overall, we don't think that the deleveraging process in the stock market has run its course and the market may stay volatile in coming weeks.

*  *  *

Longer term, the psychological damage from the two-week long sharp market decline may linger for a while. This means that any market rebound will unlikely be strong in our view.

On Monday, we highlighted what we called an “insane” debt chart and explained what it means for the PBoC. Here’s a recap:

China has launched a bewildering hodge-podge of hastily construed easing measures that can't seem to get out of their own way. Perhaps the most poignant example of this is how the country’s massive local government debt swap effort — which, as a reminder, aims to restructure a provincial government debt load that amounts to 35% of GDP — is effectively making it more difficult for the PBoC to keep a lid on rates, even as the central bank has embarked on a series of policy rate cuts. 

Despite it all, China will likely continue to cut rates over the course of the next six months in a futile attempt to avert an economic and financial market collapse. In the end, the only recourse will be ZIRP and ultimately QE.

With that in mind, consider the following chart from SocGen which shows the projected supply for local government bond issuance in China. If the new muni bonds issued as part of the debt swap program are effectively treasury bonds — as Citi contends— then ask yourself the following question: how effective can benchmark rate cuts possibly be in terms of keeping a lid on rates with CNY20 trillion in new supply of what are effectively treasury bonds flooding the market? The answer is “not very effective,” which means that someone will need to soak up that supply directly. Enter Chinese QE.

As a reminder, we've long said China's LGB refi initiative would eventually form the backbone of Chinese QE. Here is what we said in March when the program was in its infancy: "It seems as though one way to address the local government debt problem would be for the PBoC to simply purchase a portion of the local debt pile and we wonder if indeed this will ultimately be the form that QE will take in China." Similarly, UBS has suggested that when all is said and done, the PBoC will end up buying the new munis outright. From a March client note:

Chinese domestic media citing "sources" saying that the authorities are considering a Chinese "QE" with the central bank funding the purchase of RMB 10 trillion in local government debt. In fact, the "sources" seem to be some brokerage research reports speculating ways of addressing the stock of local government debt, following the MOF announcement that local governments have been given a RMB 1 trillion quota to issue bonds to replace other forms of local government debt.

And so, here we are barely a month into the new LGB debt swap initiative (which, you're reminded, hasalready morphed into a Chinese LTRO program after the PBoC, recognizing that banks would be generally unwilling to take a 300bps hit in the swap, promised to allow participating banks to pledge the new munis for cash loans which can then be re-lent in the real economy at 6-7%) and the calls have begun for outright QE. Here's Bloomberg:

PBOC should directly or indirectly buy local gov bonds to ease concern that long-term interest rates will climb and help lower leverage, Haitong Securities analysts led by Jiang Chao write in a note today.

Local govts will use up 150-200b yuan of debt swap quota per week: Haitong

About 1.4t yuan of quota remaining, to be used up in 7-8 wks: Haitong

China may announce 3rd installment of debt swap quota in 4Q: Haitong

Local debt issuance sucks liquidity, reduces banks’ capital to buy bonds, contributes to stock slump: Haitong

Note that this rather hyperbolic appeal for implementing full-on QE in China checks all the boxes: there's a reference to bond market illiquidy, an assertion about constraints on bank balance sheets (which, with credit creation stalling in China, is a big deal), and most importantly, a contention that somehow, the LGB debt swap program is contributing to the implosion of China's all-important equity bubble. 

A few more 'independent' assessments like these is likely all the PBoC will need to justify joining the global QE parade.

By EconMatters

Concerned about a tumbling equity market, PBOC moved to cut both interest rates and the reserve requirement ratio for banks over the weekend.  However, increasingly wary of a market bubble in China, investors still sent Shanghai Composite spiraling down another 3.3% on Monday after the dramatic 7.4% plunge last Friday despite the support from the central bank.

Chaos on Three Continents

Investors are also unnerve by the latest development of Greece just days before a total default and Grexit out of EU, and the news that Puerto Rico could become another Greece of the U.S. facing a financial crisis and cannot pay back its $70 billion in municipal debt.

Read: China's $370 Billion Margin Call

VIX Spike

MarketWatch reported that VIX spiked 33% to above 18, the highest since February, implying that investors are very nervous about the chaos going around.

Beijing Targets Soft Landing?

If you think U.S. stocks are lofty trading at an average of 16 times last year's earnings, the average Chinese stock is now trading at 30 times earnings.

Analysts at HSBC think the China's central bank was trying to engineer a "soft landing" for stocks. But this could be a difficult balancing act trying to shore up investors' confidence while keeping a lid on the speculative fever among Chinese retailer investors (Remember those Chinese housewives who bought up 300 tons of gold and made Goldman Sachs swallow their gold selling recommendation?)

Read: Is China Under The Skyscraper Curse?

$1.3 trillion, an Entire Spain, in 17 Days

The Shanghai Composite has fallen 21.5% since its June 12 peak wiping out ~ $1.3 trillion in market cap. To put this in perspective, Quartz pointed out that the ~ $1.3 trillion loss in market cap, in 17 days, is close to the combined market capitalization of Spain’s four stock exchanges, and it’s not even counting losses in Shenzhen, China’s other major bourse.

Size Does Matter 
Greece has been the center of financial market attention for the past few months.  With a record $370 billion in margin trades, the Chinese stock market is looking even more ominous.

Only time will tell if Beijing's able to turn the situation (i.e. slowing economy with a bubbling equity market) around.  But if the world's biggest trading nation suddenly has a crisis of some sort, it would be a catastrophe of a different scale.  Size does matter when it comes to financial collapse, and China could do far worse damage than any Grexit or PIIGS debt default.

Chart Source: Quartz

In the past week, the one recurring theme among the permabullish parade on financial propaganda TV has been to ignore the closed stock market and banks in suddenly imploding Greece, the situation in Puerto Rico, the recent plunge in US stocks which are now unchanged for the year, and what may be the beginning of the end of the Chinese bubble and instead focus on the "strong" US fundamentals, especially among tech stocks - the only shiny spot an an otherwise dreary landscape (and definitely ignore the energy companies; nobody wants to talk about those). So we decided to take a look at just what this "strength" looks like.

Well, we already saw the collapse in hedge fund hotel Micron Technology, which plunged 30% after it slashed its guidance last week. Alas that may be just the beginning. Here are the year-over-year revenue "growth" estimates for some of the biggest tech companies in Q2:

• Hewlett Packard: -7.3%
• IBM: -14.2%
• Microsoft: -5.5%
• Intel -4.5%
• Texas Instruments -1.1%
• Western Digital -7.2%
• Ericsson -19.6%
• Qualcomm -13.9%
• NetApp -11.3%

And that is the best sector among the "strong fundamentals" story.

In fact, the only bright light in the entire tech space may well be AAPL whose sales are expected to grow 29%. We wish Tim Cook lot of strength if the recent Chinese market crash has dampened discretionary spending and demand for AAPL gizmoes in China. He will need it.

But what's worse is that while reality will clearly be a disaster, there is always hype and always hope that the great rebound is just around the corner, if not in Q2 then Q3, or Q4, etc.

This time even the hype is be over because none other than the most influential bank on Wall Street, the one all other sellside "strategists" religiously imitate, Goldman Sachs, just slashed its EPS and S&P500 year end price forecast for both 2015 and 2016.

Here is Goldman with its explanation why it is lowering S&P 500 EPS:

We reduce our near-term earnings forecasts to incorporate diminished US GDP growth, a stronger dollar, and lower crude prices. Since October 2014 when we published our previous EPS forecast, expected 2015 real GDP growth has declined by 70 basis points (to 2.4% from 3.1%), the trade-weighted US dollar has strengthened by 9%, and crude prices have dropped by nearly 30%. In response to these macro headwinds and two additional quarters of realized earnings data, we lower our 2015 EPS target by $8 to $114 (from $122) and reduce our 2016 EPS by $5 to $126 (from $131). Energy EPS alone will decline by $8 in 2015, from $13 to $5.

However...

We maintain our 2015 S&P 500 target of 2100. Reduced EPS growth will be offset by a stable P/E. We previously forecast higher earnings with a P/E contraction. Our new EPS forecast is $114 (down from $122) reflecting slower GDP growth than we had originally assumed, a stronger US dollar, and a collapse in Energy company profits. S&P 500 will post just 1% EPS growth in 2015.... Initial Fed hike in December will allow P/E to end 2015 at an elevated 16.7x

So earnings are bad and getting worse, but for Goldman that is not a reason to cut its S&P forecast simply because the economy is weaker than expected and also getting worse which means the rate hike originally forecast to take place in June is now set to take place in December, and thus boost P/E multiples (it won't of course but that will be Greece's fault).

We maintain our S&P 500 price target of 2100 for 2015, as the negative impact of our lower EPS is offset by a later-than-previously-expected Fed hike. Our US economics team now believes the first hike will take place in December rather than September. S&P 500 P/E, which is historically rich, will stay elevated through the remainder of 2015, but will compress when the Fed starts its tightening cycle in December. Looking forward, S&P 500 will rise alongside earnings, increasing 5% in 2016 and 2017 to 2200 and 2300, respectively

So... the combination of deteriorating earnings and an even bigger slowdown in the economy ends up being a wash and keeping the S&P year end price target at 2100.

Ah, the magic of financial Goldman's financial gibberish.

So aside from Goldman's 21x forward multiple (because 114 non-GAAP is about 100 GAAP which means Goldman is expecting a 21 Price to GAAP Earnings multiple) simply due to the Fed's hike delay from June to December, is there any good news?

No.

In fact, this is what Goldman's David Kostin has to say: "Macro headwinds diminish 2015 earnings growth prospects. S&P 500 sales will fall by 2% in 2015, the first annual decline in five years. Margins will slip to 8.9%. Energy is a drag on both sales and margins." Let's just focus on the "near-term" slip before we worry about the "long-term rebound."

And before the intrepid questions of "this is only due to energy" arise, here is Goldman explaining that the weakness was broad, and impacted every single sector.

We lowered 2015 EPS levels in all 10 sectors, with Energy and internationally-exposed Information Technology declining most. We trimmed nearly $2 from our 2015 Energy EPS estimate after further cutting both expected sales growth and margins (see Exhibit 1). Information Technology EPS was cut by $2, due to the sector’s leverage to diminished economic growth and foreign exchange risk (60% of sector revenues generated abroad versus 33% for S&P 500).

But wait, there's more: because in addition to its EPS forecast, Goldman also slashed its GDP and the 10Y yield forecast as well.

We expect US GDP will grow at an average annualized rate of 2.4% in 2015 and 2.8% in 2016. In contrast, last October our assumed growth rates for the US economy equaled 3.1% and 3.0% for 2015 and 2016, respectively (see Exhibit 2). While our previous assumptions incorporated a sizeable 18% decline in crude oil prices, the actual decline has been twice as large, averaging 36% on a year-over-year basis.

So ok, Goldman had a 25% error in its forecast in just under 9 months. Does that mean that the vampire squid is even remotely remorseful or concerned about the credibility of its 2017 and 2018 (yes, 2018) forecasts?  Not at all: those are expected to remain completely unchanged on the back of some of the highest EPS gains in recent history. In fact, putting in context, Goldman now expects just 1% EPS growth in 2015 which will then magically soar to 11% in 2016 before "stabilizing" to a "modest" 7% annual EPS growth rate.

We expect S&P 500 operating EPS of $134 (+7%) in 2017 and $143 (+7%) in 2018. We expect S&P 500 ex-Financials and Utilities revenue will increase by 6% in 2017 and by 5% in 2018. Coupled with stable margins of 9.3%, ex-Financials and Utilities EPS should rise by 6% and 5%, respectively. We assume Financials and Utilities EPS growth of 10% during 2016 and 13% in 2017.

With just a little hyperbole, we can say that the only way S&P EPS will grow at that pace is if the S&P ends up buying back half its float.

But while one can double seasonally adjust non-GAAP BS until a massive loss becomes a huge profit, one item can not be fabricated: sales. It is here that Goldman has far less to say for obvious reasons.

Our new forecast assumes Energy sales will shrink 32%, pulling aggregate S&P 500 sales growth into negative territory for the first time in five years. We expect S&P 500 sales per share to decline by 2% in 2015, in line with consensus.

Yes you read that right "sales per share", because if buybacks can boost Non-GAAP earnings, why not revenues too. 

If there is a silver lining on the horizon it is one: "We forecast Health Care will grow sales faster than consensus expects."

The corporations thank you Obamacare.

* * *

So to summarize: the first revenue drop for the S&P in 5 years, a major downward revision in EPS now expecting just 1% increase in 2015 EPS, a 25% cut to GDP forecasts, a machete taken to corporate profits and 10 Yields, and not to mention double digit sales declines for some of the most prominent tech companies in the world.

And that, in a nutshell, is the "strong fundamentals" that everyone's been talking about.

The First Chairman of the UK's Financial Services Authority Howard Davies writes an essay on financial repression .. "Maybe it is unreasonable for investors to expect positive rates on safe assets in the future. Perhaps we should expect to pay central banks and governments to keep our money safe, with positive returns offered only in return for some element of risk." .. Davies worries about the consequences of financial repression on the economy .. he sees distortions from the prudential regulation adopted in reaction to the financial crisis - "The question for regulators is whether, in responding to the financial crisis, they have created perverse incentives that are working against a recovery in long-term private-sector investment."

BCA Research's Chief Economist Martin Barnes sees financial repression as "here to stay" for the long-term, given the challenges of low economic growth & high debt globally .. Barnes has written a special report to explain why debt burdens are moe likely to rise than fall over the short & long run given demogaphic trends & the low odds of another economic boom .. BCA Research: "If governments cannot easily bring debt ratios down to more sustainable levels, then the obvious solution is to make high debt levels easier to live with. This can be done be keeping real borrowing costs down and by regulatory pressures that encourage financial institutions to hold more government securities. In other words, financial repression is the inevitable result of a world of low growth and stubbornly high debt. Martin argues that central banks are not overt supporters of financial repression, but they certainly are enablers because they have no other options other than to keep rates depressed if they cannot meet their growth and/or inflation targets. A world of financial repression is an uncomfortable world for investors as it implies continued distortions in asset prices, and it is bound to breed excesses that ultimately will threaten financial stability."

“Monetary policy does affect pricing in today’s market to such an extent that monetary policy itself has been a risk you have to watch .. Investors are focused more on monetary policy changes than has been generally the case, than at any time, as far as I can remember .. As anything that moves prices is a risk that has to be monitored, here the effects of monetary policy affect prices dramatically .. It’s of course always been the case with long rates, and now more significantly with the currency. That’s just a fact of the current market."

- Yngve Slyngstad, chief executive officer of Norway’s $890 billion sovereign-wealth fund