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The much vaunted “V” recovery is improbable. To simplify, a somewhat “w”-looking scenario is a higher probability. After such an abrupt and extraordinary collapse in economic activity, a decent bounce was virtually assured. Millions would be returning to work after temporary shutdowns to a substantial chunk of the U.S. services economy. There would be pent-up demand, especially for big ticket home and automobile purchases. A massive effort to develop vaccines would ensure promising headlines.

With incredible amounts of liquidity sloshing around, constructive data supporting the “V” premise were all the markets needed. The enormous scope of hedging and shorting activity back in the March and April timeframe ensured the availability of more than ample firepower to fuel a rally. An equities revival would then spur a general restoration of confidence and spending – in a self-reinforcing “V” dynamic.

Inevitably, highly speculative Bubble Markets inflated way beyond anything even remotely justified by the fundamental backdrop – actually coming to believe the “V” hype. The rapid recovery phase, however, will prove dreadfully short-lived. Scores of companies won’t survive, and millions of job losses will prove permanent. Fearful consumers have made lasting changes in spending patterns, with many retrenching. Tons of fiscal stimulus will be burned through with astonishing rapidity. And a raving Credit market luxuriating in Fed monetary inflation will confront Credit losses at a breadth and scale much beyond the last crisis.

My concern has been that the COVID dislocation would be with us for a while. It’s surprising we haven’t seen at least some relief as summer unfolds. I was not expecting major outbreaks in Arizona, Florida, Texas and Southern California this time of year.

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

Credit Markets – The Waiting Game

April 15, 2020

Credit Markets – The Waiting Game

Everything and the Kitchen Sink

After the first inter-meeting rate cut in early March, we opined that further rate cuts were a near certainty and that “not-QE” would swiftly morph into “QE, next iteration” (see Rate Cutters Unanimous for the details). As it turned out, the monetary mandarins did not even wait for the official FOMC meeting before deciding to throw everything and the kitchen sink at the markets. Not only were rates insta-ZIRPed, but “not-QE” became “QE on steroids, plus”.

The federal debt monetization machinery goes into orbit. Moon landing next?

The “plus” stands for the alphabet soup of additional support programs for various slices of the credit markets, ranging from money markets to commercial paper to corporate bonds (investment grade only – for now). Alan Greenspan once said in Congressional testimony that if need be, the Fed would one day even “monetize oxen” – he may well live to see it.

What spooked the central bank was clearly the fact that corporate credit markets froze in response to the stock market crash and the lockdown measures. The latter have left a great many companies bereft of cash flows, not an ideal situation considering that trillions in corporate debt have to be refinanced in coming months and years. We have long argued that burgeoning corporate debt was the Achilles heel of the bubble, and this remains the case.

When the stock market crash started, money initially continued to flow into investment grade corporate bonds. LQD (investment grade corporate bond ETF) still made new highs in early March, while stocks were already in free-fall. But that didn’t last, and in less than two weeks LQD not only joined the crash, but began to trade at unprecedentedly large discounts to its NAV.

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Realizing the Full Implications of the Forthcoming Catastrophe

July 27, 2019

Realizing the Full Implications of the Forthcoming Catastrophe

Delivering Tomorrow’s Curses

Roman poet Virgil penned these words in his epic, The Aeneid, roughly a generation before the birth of Jesus of Nazareth. They can be loosely translated to, “the descent to hell is easy.” Those who’ve traversed this passage can attest to the veracity of this axiom.

Virgil reading the Aeneid to Augustus, Octavia and Livia. Contrary to what one might think at first blush, Octavia didn’t fall asleep because she was bored by it – rather, when Virgil recited Book Six, she fainted (the veracity of this account is not undisputed, but it’s a good story anyway). A little side note: Virgil caught a fever while returning from to Rome from Greece and died in Brundisium in 19 BC. It was Virgil’s wish that the poem be burned, but Augustus ordered his literary executors to preserve it and publish it with as few editorial changes as possible. Thus Augustus rescued the Aeneid for posterity. [PT]

Though not apparent in the milieu of Virgil’s poem, for our purposes today, we will extend its application to the insidious progression of currency debasement. What short utterance more aptly characterizes the steady degradation, as currently practiced by today’s church of state?

On Thursday, for example, the House acted with untroubled ease to further America’s descent to hell. With little resistance, federal spending was increased and the debt ceiling was suspended for two years. Having delivered tomorrow’s curses, the nation’s Representatives can skip town without missing a moment of summer recess.

As you can see, the allure of getting something for nothing is far too enticing for even the most honest politician to pass up. And with an endless supply of fake money behind you, why stick your neck out and get clobbered? The public debt encumbered is already well beyond honest repayment. But that’s a problem for tomorrow; not today.

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

“Yellow Light” – Is The Credit Market Finally Reversing

July 26, 2019

“Yellow Light” – Is The Credit Market Finally Reversing

Keep digging

Yesterday, the European Central Bank held a stand-pat meeting, keeping the benchmark deposit rate at negative 40 basis points.

However, ECB president Mario Draghi indicated that rate cuts and a resumption of asset purchases are on tap for September. In the accompanying presser, the outgoing ECB chief captured the mood of central bank-levitated markets, stating that: “it’s difficult to be too gloomy today,” while the outlook “is getting worse and worse.” The German 10-year yield traded as low as negative 42 basis points, briefly crossing below the 40 basis point deposit rate.

While sovereign debt holders continue to rack up mark-to-market gains, not everyone is enamored with the prospect of still-more negative interest rates.

“We already have a devastating interest rate situation today, the end of which is unforeseeable,” Peter Schneider, who represents banks in the south-eastern German state of Baden-Württemburg, told Bloomberg yesterday.
“If the ECB aggravates this course, that would hit not only the entire financial sector hard, but especially savers.”

Meanwhile, policymakers down under attempt to quantify the practical limits of negative policy rates. In a paper written to New Zealand finance minister Grant Robertson in January and recently released to the public, staffers in the Treasury Department concluded:

“The Reserve Bank expect rates could only fall at most 35 basis points below zero before risking the hoarding of physical cash.”

Today, the global stock of negative-yielding debt rose to $13.74 trillion, a new record.

Yellow light

As we close out month 121 of the longest economic expansion on record, let’s take a look at the state of U.S. corporate credit. Year to date, investment-grade bonds have generated a whopping 12.3% total return, while high-yield has returned 10.6%. Leveraged loans have lagged far behind, with the LSTA Index gaining just 3.3% so far this year.

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

Weekly Commentary: Powell Federal Reserve Lowers “Fed Put” Strike Price

December 22, 2018

Weekly Commentary: Powell Federal Reserve Lowers “Fed Put” Strike Price

I have little confidence history will get this right. Today’s overwhelming consensus view holds that Powell this week committed a major policy blunder. After his early-October “we’re a long way from neutral” “rookie mistake”, he has followed with a rate increase right in the throes of a stock market sell-off, Credit market instability and mounting global and domestic economic risk. He stated the Fed’s balance sheet runoff was stuck on autopilot, even as stunned market participants fret illiquidity. Moreover, Powell disappointed skittish markets heading right into December quadruple-witch options expiration – in the face of an impending government shutdown. How times have changed.

There was irony in Alan Greenspan joining Bloomberg’s Tom Keene Wednesday for live coverage of the FOMC policy decision. It was, after all, the original “Greenspan put” that morphed over Bernanke’s and Yellen’s terms into the interminable “Fed put.” Markets this week were desperate for confirmation that the Powell Fed would uphold the tradition of pacifying the markets and, when needed, invoking the Federal Reserve backstop. Markets were prepared to begrudgingly tolerate a rate increase. But the marketplace demanded evidence – an explicit signal – that the FOMC recognized the gravity of market developments and was prepared to intervene. Chairman Powell didn’t share the markets’ agenda.

Our Federal Reserve Chairman should be commended. Under extraordinary pressure, Mr. Powell and the FOMC didn’t buckle.

Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment.

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

Weekly Commentary: Canary in the Credit Market’s Coal Mine

November 18, 2018

Weekly Commentary: Canary in the Credit Market’s Coal Mine

What ever happened to “Six Sigma”? GE was one of the most beloved and hyped S&P500 stocks during the late-nineties Bubble Era. With “visionary” Jack Welch at the helm, GE was being transformed into a New Age industrial powerhouse – epitomizing the greater revolution of the U.S. economy into a technology and services juggernaut.

GE evolved into a major financial services conglomerate, riding the multi-decade wave of easy high-powered contemporary finance and central bank backstops. GE Capital assets came to surpass $630 billion, providing the majority of GE earnings. Wall Street was ecstatic – and loath to question anything. GE certainly had few rivals when it came to robust and reliable earnings growth. Street analysts could easily model quarterly EPS (earnings per share) growth, and GE would predictably beat estimates – like clockwork. Bull markets create genius.

It’s only fitting. With a multi-decade Credit Bubble having passed a momentous inflection point, there is now mounting concern for GE’s future. Welch’s successor, Jeffrey Immelt, announced in 2015 that GE would largely divest GE Capital assets. These kinds of things rarely work well in reverse. Easy “money” spurs rapid expansions (and regrettable acquisitions), while liquidation phases invariably unfold in much less hospitable backdrops. Immelt’s reputation lies in tatters, and GE today struggles to generate positive earnings and cash-flow.

When markets are booming and cheap Credit remains readily available, Wall Street is content to overlook operating cash flow and balance sheet/capital structure issues. Heck, a ton of money is made lending to, brokering loans for and providing investment banking services to big borrowers. That has been the case for the better part of the past decade (or three). No longer, it appears, as rather suddenly balance sheets and debt matter.

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

Italy’s Debt Crisis Thickens

October 19, 2018

Italy’s Debt Crisis Thickens

But outside Italy, credit markets are sanguine, and no one says, “whatever it takes.”

Italy’s government bonds are sinking and their yields are spiking. There are plenty of reasons, including possible downgrades by Moody’s and/or Standard and Poor’s later this month. If it is a one-notch downgrade, Italy’s credit rating will be one notch above junk. If it is a two-notch down-grade, as some are fearing, Italy’s credit rating will be junk. That the Italian government remains stuck on its deficit-busting budget, which will almost certainly be rejected by the European Commission, is not helpful either. Today, the 10-year yield jumped nearly 20 basis points to 3.74%, the highest since February 2014. Note that the ECB’s policy rate is still negative -0.4%:

But the current crisis has shown little sign of infecting other large Euro Zone economies. Greek banks may be sinking in unison, their shares down well over 50% since August despite being given a clean bill of health just months earlier by the ECB, but Greece is no longer systemically important and its banks have been zombies for years.

Far more important are Germany, France and Spain — and their credit markets have resisted contagion. A good indicator of this is the spread between Spanish and Italian 10-year bonds, which climbed to 2.08 percentage points last week, its highest level since December 1997, before easing back to 1.88 percentage points this week.

Much to the dismay of Italy’s struggling banks, the Italian government has also unveiled plans to tighten tax rules on banks’ sales of bad loans in a bid to raise additional revenues. The proposed measures would further erode the banks’ already flimsy capital buffers and hurt their already scarce cash reserves. And ominous signs are piling up that a run on large bank deposits in Italy may have already begun.

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

Weekly Commentary: “Not Clear What That Means”

November 18, 2017

Weekly Commentary: “Not Clear What That Means”

November 15 – Bloomberg (Nishant Kumar and Suzy Waite): “Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.”

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It’s not clear what that means’.”

Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.
…click on the above link to read the rest of the article…

Commodity Carnage Continues Amid Fears Of Glencore Liquidation

September 28, 2015

Commodity Carnage Continues Amid Fears Of Glencore Liquidation

Despite a relatively unchanged US Dollar, commodities across the board are under significant (and seemingly coordinated) pressure this morning. It appears that the key selling began as Europe opened and the carnage in massive commodity group Glencore began to materialize. Glencore CDS is now above 700bps (up 154bps today) and stocks down almost 30% today…

Commodities being sold systemically despite a lack of FX-driven impact…

And even more worrying, Bank counterparty risk is re-soaring…

Charts: Bloomberg

Corporate foie gras

September 6, 2015

Corporate foie gras

One of the arguments put forth in the bull vs. bear debate is that the solidity of US non-financial corporations have never been stronger. The amount of cash held by non-financial corporations has risen 150 per cent since the depth of the crisis in 2009. With such a massive cushion to stave off whatever the market may throw at them, they will be able to cope, or so it is held.

In addition, we know that financial corporations are flush with cash, or excess reserves held at the Federal Reserve. Throughout the various quantitative easing (QE) programs conducted by the Federal Reserve, commercial banks have been force fed cash as ducks on a foie gras farm. This has swelled their excess reserves to the unprecedented, and what would be thought unimaginable only few years’ back, level of US$2.6 trillion.

With all this cash the system should be, again according to the perma-bulls, more than ready to withstand the shock from the ongoing global deleveraging, a stronger dollar, emerging market blow-ups and the forthcoming US recession.

We beg to differ. When it comes to excess reserves they are most likely already “spoken” as a form of collateral in shadow banking chains. While the initial effect from QE on the shadow banking system was massive deflationary shock as all the high quality securities used in re-hypothecated collateral chains were soaked up by the Federal Reserve, it is a safe bet that excess reserves has to some extend filled that void.

In the non-financial sector on the other hand cash is, well, plain old cash. With more than US$1 trillion of the stuff on their balance sheet complacency is destined to be prevalent. And it is.

Credit market instruments, id est. debt, have also risen at a tremendous rate. Net debt, that is credit market liabilities less cash, has actually never been higher. As the chart below shows, sitting at more than US$6.6 trillion, non-financial net debt outstrips even the high from 2008.

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

Credit Market Warning: Long-awaited signs of danger are materalizing

June 20, 2015

Credit Market Warning: Long-awaited signs of danger are materalizing

There are large signs of stress now present in the credit markets. You might not know it from today’s multi-generationally low interest rates, but other key measures such as liquidity and volatility are flashing worrying signs.

Look, we all know that this centrally planned experiment forcing financial assets ever higher is simply fostering multiple bubbles, each in search of a pin. As all bubbles do, they are going to end with bang.

I keep my eyes on the credit markets because that’s where the real trouble is brewing.

Today’s markets are so distorted that you can reasonably argue that there’s not much in the way of useful signals emanating from them. And I wouldn’t put up too much of a counter-argument. But it’s my contention that the bond market is the place to watch as it will provide the most useful clues that a reckoning has begun. And when these markets eventually return to earth, there will be blood in the streets.

While some may hope that rising yields are signaling a return to more rapid economic growth, or at least that the fear of outright deflation has lessened, the more likely explanation is that something is wrong and it’s about to get… wronger.

Rising Yields

Let’s begin with the first canary in this story, rising yields. The yield of a bond, expressed as a rate of interest, moves oppositely to its price. The higher the price goes, the lower the yield goes. The lower the price, the higherthe yield. Imagine the relationship like a playground see-saw.

Over these past few weeks and months, we’ve seen yields moving up quite a lot across a wide variety of bonds, at least in terms of the percentage size of the move (yes, the yields are still historically low by any measure).

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

As Goes The Credit Market, So Goes The World

June 6, 2015

As Goes The Credit Market, So Goes The World

When confidence cracks, we’ll see it there first

During the prior economic cycle of 2003-2007, one question I asked again and again was: Is the US running on a business cycle or a credit cycle?

That question was prompted by a series of data I have tracked for decades; data that tells a very important story about the character of the US economy. Specifically, that data series is the relationship of total US Credit Market Debt relative to US GDP.

Let’s put this in simple English. What is total US Credit Market Debt? It’s an approximation for total debt in the US economy at any point in time. It’s the sum total of US Government debt, corporate debt, household debt, state and local municipal debt, financial sector and non-corporate business debt outstanding. It’s a good representation of the dollar amount of leverage in the economy.

GDP is simply the sum total of the goods and services we produce as a nation.

So the relationship I like to look at is how financial leverage in the economy changes over time relative to the growth of the actual economy itself. Doing so reveals an important long-term trend. From the official inception of this series in the early 1950’s until the early 1980’s, growth in this representation of systemic leverage in the US grew at a moderate pace point to point. But things blasted off in the early 1980’s as the baby boom generation came of age. I find two important demographic developments help explain this change.

First, there’s an old saying on Wall Street: People don’t repeat the mistakes of their parents. Instead, they repeat the mistakes of their grandparents. From the early 1950’s through the early 1980’s, the generation that lived through the Great Depression was largely alive and well, and able to “tell” their stories.

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What We Learned over Dinner from a Swiss Central Banker

May 30, 2015

What We Learned over Dinner from a Swiss Central Banker

Dear Diary,

Today… what we learned over dinner from a surprisingly smart central banker.

But first, to the markets…

The Dow shot up 121 Dow points yesterday, recovering most of Tuesday’s slide.

In a series of business meetings Tuesday and Wednesday, we explained why nobody but us is rooting for a depression.

Yes, there’s no point in hiding it. We would like to see a depression. Short, swift, and decisive – a quick and sharp end to the biggest credit expansion in all of history.

As secretary of the Treasury Andrew Mellon said after the 1929 stock market crash:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

Credit Cannot Increase Forever

“It’s unbelievable,” said colleague Merryn Somerset Webb. Merryn is the editor ofMoneyWeek magazine in London.

“London property prices just keep going up and up. It’s so expensive our writers can’t afford to live here anymore. I’m thinking of moving the business to Edinburgh.”

You can’t build a solid economy on the jelly of unaffordable housing, unpayable debts, and unsustainable asset prices. But that’s what we’ve got.

The only way to get down to something more reliable… more real… and healthier… is to wash away the financial glop and goo that has accumulated during the last 30 years.

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

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