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Ten years after the crisis, demands for leveraged loan offerings is once again off the charts. Portfolio managers who are seeking rising yields as the Federal Reserve hikes rates have shown unprecedented demand for recent deals, despite repeated warnings that they may be buying “at the wrong time.”

Leveraged loans are a type of debt that is offered to an entity that may already have significant amounts of leverage or a poor credit history. As rates move higher, the loans – whose interest rates reference such floating instruments as Libor or Prime – pay out more. As a result, as the Fed tightens the money supply, defaults tend to increase as the interest expenses rise and as the overall cost of capital increases.

Gershon Distenfeld, co-head of fixed income at AllianceBernstein LP and a longtime “skeptic of bank loans” told Bloomberg that a good way to gauge the risk in the loan market is to look at returns when loans price too high. Currently, the average outstanding loan is priced at about 98.5 cents on the dollar. According to Distenfeld’s research of market prices between 1992 and 2018, when priced at this level, annual returns are about 2.8% for the following two years – lagging both behind 5 year treasuries and high yield bonds. And yet investors are piling in, hoping for even more generous payments, and oblivious of whether the underlying credit will be viable in a higher interest rate environment.

Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC kept it simpler: “It’s not a good time to be buying bank loans,” he stated. He also noted something we have demonstrated on numerous prior occasions: lender protections are worse than usual and there’s a smaller pool of creditors to absorb losses, and as covenant protection has never been weaker.

…click on the above link to read the rest of the article…

BCA: The “Bubble In Everything” Threatens $400 Trillion In Assets

September 16, 2018

BCA: The “Bubble In Everything” Threatens $400 Trillion In Assets

By now, it’s a very familiar question: how high can the Fed hike rates before it causes a major market “event.”

Two weeks ago, Stifel analyst Barry Banister became the latest to issue a timeline on how many more rate hikes the Fed can push through before the market is finally impacted. According to his calculations, just two more rate hikes would put the central bank above the neutral rate – the interest rate that neither stimulates nor holds back the economy. The Fed’s long-term projection of its policy rate has risen from 2.8% at the end of 2017 to 2.9% in June. As the following chart, every time this has happened, a bear market has inevitably followed.

A similar argument was made recently by both Deutsche Bank and Bank of America, which in two parallel analyses observed last year that every Fed tightening cycle tends to end in a crisis.

Now, it’s the turn of BCA research to warn that ultimately the fate of risk assets depends on the relative size of the inflationary impulse being spawned by the Fed vs the remnant disinflationary impulse from monetary policies over the past decade.

In a report issued on Friday, BCA’s strategists make the key point that the performance of bonds – and stocks – in an inflation scare would depend on the relative size of the inflationary impulse compared with the disinflationary impulse that resulted from sharply lower risk-asset prices.

They make the point that if central banks were more concerned about the inflationary impulse, which at least for Fed chair Powell appears to be the case for now – Janet Yellen’s “lower for longer revised forward guidance” notwithstanding – they would have to keep tightening – in which case, bond yields would be liberated to reach elevated territory.

…click on the above link to read the rest of the article…

The Fed’s QE Unwind Hits $250 Billion

September 7, 2018

The Fed’s QE Unwind Hits $250 Billion

Here’s my math when this “balance sheet normalization” will end.

In August, the Federal Reserve was supposed to shed up to $24 billion in Treasury securities and up to $16 billion in Mortgage Backed Securities (MBS), for a total of $40 billion, according to its QE-unwind plan – or “balance sheet normalization.” The QE unwind, which started in October 2017, is still in ramp-up mode, where the amounts increase each quarter (somewhat symmetrical to the QE declines during the “Taper”). The acceleration to the current pace occurred in July. So how did it go in August?

Treasury Securities

The Fed released its weekly balance sheet Thursday afternoon. Over the period from August 2 through September 5, the balance of Treasury securities declined by $23.7 billion to $2,313 billion, the lowest since March 26, 2014. Since the beginning of the QE-Unwind, the Fed has shed $152 billion in Treasuries:

The step-pattern of the QE unwind in the chart above is a consequence of how the Fed sheds Treasury securities: It doesn’t sell them outright but allows them to “roll off” when they mature; and they only mature mid-month or at the end of the month.

On August 15, $23 billion in Treasuries matured. On August 31, $21 billion matured. In total, $44 billion matured during the month. The Fed replaced about $20 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Wall Street – the “primary dealers” with which the Fed normally does business. Those $20 billion in securities were “rolled over.”

But it did not replace about $24 billion of maturing Treasuries. They “rolled off” and became part of the QE unwind.

Mortgage-Backed Securities (MBS)

…click on the above link to read the rest of the article…

Emerging Market Contagion Threatens Oil Market

September 4, 2018

Emerging Market Contagion Threatens Oil Market

The emerging market currency crisis is not over yet, and could yet morph into a broader contagion that threatens to drag down oil demand.

Last week, Argentina’s peso fell by around 20 percent in just a few days, taking year-to-date losses over 50 percent. The central bank frantically hiked interest rates from 45 to 60 percent in an effort to stem the losses, hoping to halt the peso’s spiraling descent. The peso regained a bit of ground, but now trades at over 37 pesos to the dollar, compared to 27 pesos per dollar in early August and 18 pesos at the start of the year.

This may seem like a problem for Argentines, but the currency turmoil is indicative of a broader malaise sweeping over emerging markets. A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down.

…click on the above link to read the rest of the article…

The Anatomy of a Crisis: A Strong Dollar and Disappearing Liquidity

August 19, 2018

The Anatomy of a Crisis: A Strong Dollar and Disappearing Liquidity

Since March – the dollar’s rallied over 7%. And it’s caused the Emerging Markets to implode.

But the bigger problem is what lies ahead.

And that’s a global dollar shortage – which the mainstream continues to ignore. . .

I’ve touched on this a couple months back. Wondering when the mainstream would start to realize that the stronger the dollar gets – the more pressure global economies will feel.

I wrote. . . “This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile. Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But if the Fed is shrinking their balance sheet, that means the bonds they’re selling to banks are sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every global economy.”

Since then, things have only gotten worse. . .

First: Jerome Powell – the Fed Chairman – issued a statement at the end of June that they would actually increase the amount of rate hikes over the next two years. This means they’re tightening even faster.

Second: the U.S. Treasury increased their debt-borrowing needs to the highest since the financial crisis – which was over a decade ago. Therefore, they will need even more dollars to fund their spending.

“The department expects to issue $329 billion in net marketable debt from July through September, the fourth-largest total for that quarter on record and higher than the $273 billion estimated in April [a 17% increase], the Treasury said in a report Monday. The department’s forecast for the October-December quarter is $440 billion, bringing the second-half borrowing estimate to $769 billion, the highest since $1.1 trillion in July-December 2008…”

…click on the above link to read the rest of the article…

The Fed Accelerates its QE Unwind

August 4, 2018

The Fed Accelerates its QE Unwind

Mopping up liquidity.

The Fed’s QE Unwind – “balance sheet normalization,” as it calls this – is accelerating toward cruising speed. The first 12 months of the QE unwind, which started in October 2017, are the ramp-up period – just like there was the “Taper” during the final 12 months of QE. The plan calls for shedding up to $420 billion in securities in 2018 and up to $600 billion a year in each of the following years until the balance sheet is sufficiently “normalized” – or until something big breaks.

Treasuries

In July, the QE Unwind accelerated sharply. According to the plan, the Fed was supposed to shed up to $24 billion in Treasury Securities in July, up from $18 billion a month in the prior three months. And? The Fed released its weekly balance sheet Thursday afternoon. Over the four weeks ending August 1, the balance of Treasury securities fell by $23.5 billion to $2,337 billion, the lowest since April 16, 2014. Since the beginning of the QE-Unwind, the Fed has shed $129 billion in Treasuries.

The step-pattern in the chart above is a result of how the Fed sheds Treasury securities. It doesn’t sell them outright but allows them to “roll off” when they mature. Treasuries only mature mid-month or at the end of the month. Hence the stair-steps.

In mid-July, no Treasuries matured. But on July 31, $28.4 billion matured. The Fed replaced about $4 billion of them with new Treasury securities directly via its arrangement with the Treasury Department that cuts out Walls Street (its “primary dealers”) with which the Fed normally does business. Those $4 billion in securities, to use the jargon, were “rolled over.” But it did not replace about $24 billion of maturing Treasuries. They “rolled off.”

Mortgage-Backed Securities

…click on the above link to read the rest of the article…

Kass: Tops Are Processes & We May Be In That Process

July 31, 2018

Kass: Tops Are Processes & We May Be In That Process

The Yield Curve Will Likely Invert by November, 2018

Economic growth is less synchronized than the consensus believes
On a trending and rate of change basis the economic data is slowing down
The Fed’s continued pivot to tighter money will likely lead to curve inversion – which will likely stoke fears of recession

“China, Europe and the Emerging Market Economic Data All Signal Slowdown: It’s in the early innings of such a slowdown based on any realtime analysis of the economic data. The rate of change slowdown (on a trending basis) is as clear as day. A rising US Dollar and weakening emerging market economic growth sows the seeds of a possible US dollar funding crisis.” – Kass Diary, Investors are Not Being Compensated For Risk

At economic peaks everything on the surface looks Rosy (except to some observors like myself and Rosie (David Rosenberg)!) – until it doesn’t.

Towards that end, here is what I wrote yesterday about US and overseas economic growth in my two part opener:

“Global Growth Is Less Synchronized as the trajectory of worldwide growth is becoming more ambiguous. I have featured the erosion in soft and hard high frequency data in the US, Europe, China and elsewhere extensively in my Diary – so I wont clutter this missive with too many charts. But needless to say (and seen by these charts and here), with economic surprises moderating from a year ago and in the case of Europe falling to two year lows – we are likely at ‘Peak Global Growth’ now. (The data is even worse in South Korea, Taiwan, Indonesia and Thailand).

…click on the above link to read the rest of the article…

“It Was Only A Matter of Time”: Trump Sets His Sights on the Fed’s Tightening and the Strong Dollar

July 21, 2018

“It Was Only A Matter of Time”: Trump Sets His Sights on the Fed’s Tightening and the Strong Dollar

Who says that the President doesn’t – and shouldn’t – pay attention to the U.S. Dollar’s value?

Well – President Trump sure does. . .

Just look at his tweets from this morning. . .

This came just a few hours after Trump criticized the Federal Reserve’s tightening path.

Trump went on to say during an interview with CNBC that he’s “not thrilled” with the Fed’s tightening – potentially slowing the economy.

“I don’t like all of this work that we’re putting into the economy and then I see rates going up.” said Trump

His comments shocked many. There’s a tradition – or rather a taboo – that the White House stays away from monetary policy.

But we should know better – Trump will always do what Trump wants.

And it’s clear that what trump wants is a weaker dollar. . .

So far, the Fed’s hiked rates five times since Trump entered office. And from what I can see, the economic growth cycle has peaked and now is heading downwards.

I’ve written that over the last 15 months – the U.S. economy has grown a bit. But that was all from a weakening dollar.

From January 2017 to February 2018 – the USD fell more than 14%. This greatly boosted exports and helped growth – not to mention the massive amount of debt the Treasury piled on and is trickled down into the economy.

But since March, there’s been a massive short-covering rally for the dollar. And that fueled a reflexive short-term feedback loop into an even stronger dollar, all-while decimating Emerging Markets and commodities – basically anything that’s anti-dollar.

Now the rapidly strengthening dollar is becoming a hinderance – especially when Trump has engaged the U.S. into a trade war with the second largest economy in the world – China.

…click on the above link to read the rest of the article…

Is Trump Starting To Lean On The Fed Or Setting It Up?

July 20, 2018

Is Trump Starting To Lean On The Fed Or Setting It Up?

President Trump said in an interview with CNBC’s Joe Kernan this morning he “does not agree”, is not “thrilled” or “happy” with the FOMC’s interest rate hikes. The full interview and transcripts will be available tomorrow.

Jul19_Trump Interview

Click here for excerpt of interview

You Heard It Here First

Presidents never, or rarely comment on monetary policy or currency market moves. for that matter, x/ the hackneyed meme “a strong dollar is the best interest of the United States.”

President Trump hit them all in this interview today, from the Fed to the Euro and Chinese RMB (“dropping like a rock”). It doesn’t surprise us.

Recall our March 21st post, The Biggest Risk At The Fed.

But this doesn’t concern us as much as the Fed’s independence.

“Just let it rip”

That is we are worried more about the freedom from White House pressure and interference in conducting monetary policy than getting a few bps wrong on the Fed Funds rate. This is especially true and relevant given the strongman tendencies and lack of respect for institutional norms of the current president.

Here is Larry Kudlow, the president’s new chief economic adviser:

“Just let it rip, for heaven’s sake,” Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. “The market’s going to take care of itself. The whole story’s going to take care of itself. The Fed’s going to do what it has to do, but I hope they don’t overdo it.” – CNN
– Global Macro Monitor, March 21, 2018

We were assured by Fed insiders shortly after that post in March Chairman Jerome Powell was tough and we should not underestimate his independence. He has thus far proven to be an extraordinarily competent Fed leader.

…click on the above link to read the rest of the article…

Five Pillars of Debt Default

July 17, 2018

Five Pillars of Debt Default

Regular readers of Gold Goats ‘n Guns know that I’ve been handicapping a major sovereign debt default to begin here in 2018 or early 2019. But, what do I mean by that?

How does a sovereign debt default come about? And who will default?

There are a staggering number of factors that feed into this thesis but, for me, to keep it simple it comes down to five important trends coming to a head at the same time.

I call them the Five Pillars.

#1 Massive Foreign Corporate Debt

After ten years of ‘experimental monetary policy’ which drove borrowing costs in U.S dollars down to record lows, foreign companies still reeling from the after-effects of the 2008 financial crisis borrowed trillions of dollars to fund the global expansion of the past few years.

That debt pays investors in US dollars.

But, foreign companies tend to book revenue in their local currency.

A falling local currency makes dollar-denominated debt more expensive to pay off.

This leads to the next Pillar…

#2 Quantitative Tightening.

QT is simply the opposite of QE, Quantitative Easing. QE expanded the stock of dollars. QT is contracting it. This is what is fueling a rising U.S. dollar. This, in turn, is making it harder for foreign companies to keep up with their bond payments.

They are forced to sell, aggressively, their local currency and buy dollars in the open market.

This is why the Turkish Lira is in serious trouble, for example.

That puts pressure on the country’s sovereign bond market. Since a falling currency lowers the real rate of return on the bond.

Falling currency, falling bonds, Turkey will put on capital controls next.

This feeds into the next Pillar…

#3 Political Unrest in Europe and Emerging Markets

…click on the above link to read the rest of the article…

Update on the Fed’s QE Unwind

July 8, 2018

Update on the Fed’s QE Unwind

With QE, the Fed created money to buy securities and pump up asset prices; now it sheds securities to destroy this money.

Here’s what the Fed’s QE unwind – or the balance sheet normalization, as it calls it – is all about: it reverses over an unknown span of years a large part of what QE had done over the span of five-and-a-half years. During QE, whose stated purpose was the “wealth effect,” the Fed amassed $3.4 trillion in Treasury securities and mortgage-backed securities (MBS). Just as the Fed spent a year tapering QE to zero, it is now spending a year ramping up the QE unwind.

Total assets on the Fed’s balance sheet for the week ending July 4 dropped by $29.4 billion over the past four weeks. This brought the total drop since October, when the QE unwind began, to $171 billion. At $4,289 billion, total assets are now at the lowest level since April 16, 2014, during the middle of the “taper.”

The Fed’s announced plan calls for shedding up to $420 billion in securities this year and up to $600 billion a year in each of the following years until the Fed considers its balance sheet to be “normalized” — or until something major goes awry. For June, the plan calls for the Fed to shed up to $18 billion in Treasuries and up to $12 billion in MBS. So how did it go?

Treasury securities

The balance of Treasury securities fell by $17.5 billion in June to $2,360 billion, the lowest since May 7, 2014. Since the beginning of the QE-Unwind, $105 billion in Treasuries “rolled off.”

The step-pattern in the chart below is a result of how the Fed sheds securities. It doesn’t sell them outright but allows them to “roll off” when they mature. Treasuries only mature mid-month or at the end of the month. Hence the stair-steps.

…click on the above link to read the rest of the article…

India Central Bank Intervenes As Rupee Crashes To Record Low

June 28, 2018

India Central Bank Intervenes As Rupee Crashes To Record Low

Just weeks after Urjit Patel, Governor of the Reserve Bank of India, wrote an op-ed in the FT warning that should the US maintain its current pace of monetary policy tightening, it could have serious repercussions for the global economy, it is…

It was the first time this tightening cycle that a prominent foreign central banker has accused the Fed of stirring trouble for emerging markets, with its ongoing tightening, and specifically, the balance sheet reduction coupled with the Treasury debt issuance surge, to wit:

Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.

Patel’s advice? Immediately taper the tapering, or rather, the Fed should “recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing.”

Incidentally, the various pathways described by Patel were conveniently laid out by Deutsche Bank’s Aleksandar Kocic two weeks ago, and which we explained in “Why The Soaring Dollar Will Lead To An “Explosive” Market Repricing.”

And Patel’s warnings are coming true as The Fed’s actions are impacting India as much – if not more – than anywhere else.

The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer.

…click on the above link to read the rest of the article…

Next Central Bank Puts QE Unwind on the Calendar

June 22, 2018

Next Central Bank Puts QE Unwind on the Calendar

The end of an era spreads.

Markets were surprised today when the Bank of England took a “hawkish” turn and announced that three out of nine members of its Monetary Policy Committee – including influential Chief Economist Andrew Haldane, who’d been considered dovish – voted to raise the Bank Rate to 0.75%, thus dissenting from the majority who kept it at 0.5%. This dissension, particularly by Haldane, communicated to the markets that a rate hike at the next meeting in August is likely. The beaten-down UK pound jumped.

But less prominent was the announcement about the QE unwind. Like other central banks, the BoE heavily engaged in QE and maintains a balance sheet of £435 billion ($577 billion) of British government bonds and £10 billion ($13 billion) in UK corporate bonds that it had acquired during the Brexit kerfuffle.

Before it starts shedding assets on its balance sheet, however, the BoE wants to raise the Bank Rate enough to where it can cut it “materially” if needed, “reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy,” as it said.

In this, it parallels the Fed. The Fed started its QE unwind in October 2017, after it had already raised its target range for the federal funds rate four times.

The BoE’s previous guidance was that the QE unwind would start when the Bank Rate is “around 2%.” Back in the day when this guidance was given, NIRP had broken out all over Europe, and pundits assumed that the BoE would never be able to raise its rate to anywhere near 2%, and so the QE unwind could never happen.

Today the BoE moved down its guidance about the beginning of the QE unwind to a time when the Bank Rate is “around 1.5%.”

…click on the above link to read the rest of the article…

“Dollar Is King”: Indonesia Joins India In Begging Fed To Stop Shrinking Its Balance Sheet

June 7, 2018

“Dollar Is King”: Indonesia Joins India In Begging Fed To Stop Shrinking Its Balance Sheet

On the same day that the governor of Malaysia’s central bank quit, and just days after Urjit Patel, governor of the Reserve Bank of India, took the unprecedented step of writing an oped to the Federal Reserve, begging the US central bank to step tightening monetary conditions, and shrinking its balance sheet, thereby creating a global dollar shortage which has slammed emerging markets (and forced India into an unexpected rate hike overnight), Indonesia’s new central bank chief joined his Indian counterpart in calling on the Federal Reserve to be “more mindful” of the global repercussions of policy tightening amid the ongoing rout in emerging markets.

As Bloomberg reports, in his first interview with international media since he took office two weeks ago, Bank Indonesia Governor Perry Warjiyo – who bears a remarkable resemblance to what Jamie Dimon would look like if he were about 40 pounds overweight – echoed what Patel said just days earlier, namely that the pace of the Fed’s balance sheet reduction was a key issue for central bankers across emerging markets.

As a reminder, the RBI Governor made exactly thew same comments earlier this week, arguing that slowing the pace of stimulus withdrawal at a time when the US Treasury is doubling down on debt issuance, would support global growth, as the alternative would be an emerging markets crisis that would spill over into developed markets.

In a thinly veiled warning addressing the Fed, Warjiyo said that “we know every country must decide their policy based on domestic circumstances but look, you have to take account of your actions and the impact of your actions to other countries, especially the emerging markets.”

…click on the above link to read the rest of the article…

‘Something’s Wrong’: The Fed’s Creating Risks – But The Markets Ignoring It

June 6, 2018

‘Something’s Wrong’: The Fed’s Creating Risks – But The Markets Ignoring It

The other day I published an article calling out the markets denial of rising risks.

Even with everything that’s happening in Italy and with the Emerging Markets blowing up – expected volatility has actually decreased. . .

Basically, the stock markets pricing everything in for perfection – that the economy and markets will have low-volatility, steady growth, and calming inflation.

At least the bond market isn’t as gullible as the yield curve stays relatively flat – and heading towards inversion.

So, is it just us handful of skeptics and contrarians that don’t believe the mainstreams ‘everything’s great’ story?

Here are a couple other big names that are now doubting the ‘goldilocks’ scenario. . .

Ray Dalio and his firm, Bridgewater Associates – the world’s largest hedge fund, has been in the public eye lately thanks to his new, bestselling book – Principles.

In Bridgewater’s recent Daily Observations, the fund warns that, “2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the Fed’s tightening will be peaking…”

Bridgwater concluded with. . .

“We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop…”

Another added to the list of skeptics – a Morgan Stanley Top Analysts made statements on Bloomberg that markets are “heading into a summer that’s going to stay volatile...”

The question now we must ask is: what seems to be the common denominator behind all this volatility, instability in emerging markets, and liquidity problems?

The answer: The Federal Reserve’s tightening.

The Fed has to realize what they’re doing – I refuse to believe that the supposedly ‘greatest financial minds’ don’t do their research about the correlation between ‘easy money booms’ and ‘tight money busts’.

…click on the above link to read the rest of the article…

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