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Banks are going to drown in an ocean of defaults

Banks are going to drown in an ocean of defaults

On November 6, 2000, then US presidential candidate George W. Bush told a crowd of cheering supporters, “they misunderestimated me.”

Now, if English is not your native language, allow me to clear the air: ‘misunderestimate’ is not a word. But then again, George W. Bush was legendary for hilarious slip-ups like this.

There are entire books dedicated to his ‘Bushisms,’ the ridiculous made-up words and incomprehensible sayings that became routine for the 43rd US President.

‘Misunderestimate’ seems to be a conflation of the words ‘misunderstand’ and ‘underestimate’. And while that was utterly hysterical 20 years ago when Bush first said it, ‘misunderestimate’ may be the most appropriate word of today.

The entire world has completely ‘misunderestimated’ the Corona Virus.

In terms of misunderstand– that’s obvious. There’s so much that we don’t know about the virus (officially known as SARS-CoV-2) and the disease that it causes (COVID-19).

For example, a group of researchers published a “peer-reviewed” research paper earlier this month stating that the virus had split into multiple strains.

(Peer-reviewed is a type of self-regulation among academics; it means the paper had been evaluated by other experts before it was published.)

But other specialists in the field strongly disagreed with the paper’s conclusions.

Swiss biologist Richard Neher described the research as, “wrong, misleading. . . downright dangerous inferences,” while Australian virologist Ian Mackay called it a “weak paper and poor science.”

Another peer-reviewed study released in the Journal of Medical Virology concluded that the virus originated from snakes. But plenty of experts disagreed with that assertion too.

The scientific community has learned so much about SARS-CoV-2 since it first surfaced a few months ago.

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

“We’ve Reached The Tipping Point” – Guggenheim’s Minerd Warns Virus Will Deflate The Everything Bubble

“We’ve Reached The Tipping Point” – Guggenheim’s Minerd Warns Virus Will Deflate The Everything Bubble

Last week, Guggenheim’s Global CIO Scott Minerd exclaimed that “the cognitive dissonance in the market is stunning,” as he reflected on the ever-rising stock prices (and collapsing credit spreads) he was seeing in the face of growing global fears of the virus’ spread.

And as the market began to waken from its dissonant slumber, he warned:

“This is not a buy-the-dip market. It is a don’t-catch-a-falling-knife market. “

As he detailed to CNBC the threat the coronavirus poses to corporate earnings and the U.S. economy if the pandemic spreads.

And now, after an unprecedented collapse in stock prices and Treasury yields, Minerd details his portfolio positioning with coronavirus on the brink of pandemic.

The impact of the coronavirus has made for a crazy couple of weeks in the financial markets. Now spreading beyond Italy into other parts of Europe, it is on the brink of a pandemic and investors, fearing a sharp slowdown in global growth, have reacted by taking out support for yields for the long bond and the 10-year Treasury note. Bonds are comfortably below 2 percent and the 10-year Treasury yield is hovering around 1.3 percent. Unlikely as it may seem, technical analysis now indicates a target yield on the 30-year bond at 1 percent and the 10-year note at 0.25 percent. Stocks are nearing correction territory, with more downside likely.

At the same time that long Treasury yields are making new historic lows, credit spreads, while widening, remain relatively tight. This does not make any sense given the fundamental backdrop which indicate that defaults will rise significantly, particularly in energy, airlines, retailing, and hospitality. Nevertheless, central bank liquidity continues to drive flows into bonds at a record pace. These flows are keeping spreads tight and, until there is an interruption of the inflows, credit spreads will be contained.

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

The State of the Union: An Annual Reminder of Inevitable Default

The State of the Union: An Annual Reminder of Inevitable Default

Last night’s State of the Union was particularly noteworthy for its showmanship. Scholarships were given away, medals were awarded, families reunited. At a time when national politics is bad theater, President Trump is clearly its most gifted star.

Trump also knows what sells. As a political figure, he’s motivated not by any consistent ideology, but rather by transactional legislation. Following the performance, an MSNBC pundit noted that the speech was a “microtargeted ad” to various demographics aimed at expanding his base before next year’s election.

Combined with his Super Bowl ads highlighting criminal justice reform, his focus on charter schools and honoring a hundred-year-old Tuskegee airman are aimed at eroding away the Democrats’ 90 percent control of black voters. The cameo by Venezuela opposition leader Juan Guaidó was an appeal to Hispanic families who have fled communist regimes—perhaps a poke at Bernie Sanders. Paid family leave, a policy focus of his daughter, is intended to help him with suburban women.

What doesn’t sell? Fiscal responsibility.

The political equivalent of Crystal Pepsi, the Republican Party has given up its long-standing façade of budgetary restraint. As Donald Trump told donors earlier this year, “Who the hell cares about the budget?”

Of course, some people do care, particularly those who understand the real costs of runaway spending. Unfortunately, politics isn’t about the economic literacy of the few, but the prevailing ideology of the masses. As Jeff Deist noted in 2016, the implicit ideology of the American population is much closer to Bernie Sanders than it is to Ludwig von Mises. As such, it should be no surprise that the policies of the country align more closely with the “deficits don’t matter” vision of Modern Monetary Theorists than the sober analysis of Austrians economists.

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

Defaults in European Retailers and US Energy on the rise

Defaults in European Retailers and US Energy on the rise

2019 has been a pleasant ride so far for high yield investors. Over the past 9 months the global high yield market has delivered a total return of 10.9% and an excess return of 6.4%, in part thanks to the U-turn of major central banks. Despite all the good news, things have occasionally gone wrong.

Recent events have reminded high yield investors that investing doesn’t come without risk. Thomas Cook, the UK tour operator, was grounded after final restructuring negotiations failed. To blame Brexit or the slowdown in global growth for the default would be a hasty conclusion. The business, operating in a structurally challenged industry, had long stretched its financials to the limits. The fragile situation did not go unnoticed by customers, who had stopped booking with the business. As a result of this, 2018 EBITDA (earnings before interest, taxes, depreciation and amortisation) dropped by 14.6% year-on-year which also changed the ability to materially generate positive cash flow. The company produced a negative free cash flow of £148 million in 2018. 2019 half year numbers revealed an even worse picture, with a seasonal outflow of £839 million; £121 million higher than the previous year. Operating with current liabilities that exceeded current assets by £2bn, made the solvency issue even more pressing and, in the end, didn’t allow the company to recover in time. This is a prime example of how quickly things can fall apart if consumers lose trust in a business. With bonds trading currently at 7 cents in the euro, investors only foresee a limited recovery rate for the asset-light business, which is also carrying a large amount of debt structurally senior
to the bonds.

High Yield defaults by Issuer

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

Argentina Is Officially In Default Again: S&P Downgrades Credit Rating To SD

Argentina Is Officially In Default Again: S&P Downgrades Credit Rating To SD

The IMF just broke its own record of incompetence: less than a year after its record, $57 billion bailout of Argentina was finalized, S&P just downgraded the country from B- to Selective Default – the equivalent to a default rating – following the government’s “reprofiling” of its debt on August 28, when it unilaterally extended the maturity of all short-term paper due to the continued inability to place short-term paper with private-sector market participants. Some $101 billion in debt is affected.

However, the selective default state will last for just one day, as only a few hours later, S&P will upgrade Argentina from SF to CCC-. As S&P explains, “under our distressed exchange criteria, and in particular for ‘B-‘ rated entities, the extension of the maturities of the short-term debt with no compensation constitutes a default. As the new terms became effective  immediately, the default has also been cured. Therefore, we plan to raise the long-term ratings to ‘CCC-‘ and the short-term ratings to ‘C’ on Aug. 30, in line with our policies.”

Here is the full summary of today’s action, per S&P:

  • Following the continued inability to place short-term paper with private-sector market participants, the Argentine government unilaterally extended the maturity of all short-term paper on Aug. 28. This constitutes default under our criteria, and we are lowering the local and foreign currency sovereign credit ratings to ‘SD’ and the short-term issue ratings to ‘D’.
  • The administration is also sending legislation to Congress seeking support from the Argentine political class to engage in a re-profiling of the remaining debt, so we are lowering our long-term foreign and local currency issue ratings to ‘CCC-‘ on heightened risk of a default under our criteria.

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

Argentina Proposes IMF-Humiliating ‘Debt Re-Profile’ As It Soft-Defaults For 9th Time Since Independence

Argentina Proposes IMF-Humiliating ‘Debt Re-Profile’ As It Soft-Defaults For 9th Time Since Independence

Less than a week after we suggested The IMF is in for humiliation over the collapse of Argentina – just months after its unprecedented $56 billion liquidity crisis bailout – it appears the South American nation is set to default for the ninth time since its independence in 1816.

Amid a 20% crash in the peso and a collapse in government bonds, which pushed the implied risk of default above 80%, IMF delegates arrived in Argentina on Saturday and, as Bloomberg reports, immediately began meetings with policy makers, facing a deja vu choice from two decades ago: risk making the turmoil even worse by withholding a $5.3 billion installment due next month – or cough it up, and risk even more losses with the IMF bailout program on the verge of collapse.

“The IMF has put a lot in – not just money, but prestige,” said Hector Torres, a former executive director at the Fund who represented South American countries. 

“The fact that the arrangement is not performing well right now is an embarrassment,” he said. And the September installment is “going to be a difficult call.”

Then earlier today, things got worse as Argentina bond spreads widened to the most in 14 years after opposition leader Alberto Fernandez ripped the debt-laden country’s accord with the International Monetary Fund. Fernandez said much of the IMF loan had been wasted on financing capital flight out of the country.

In a statement following a meeting with IMF officials, Fernandez said he agreed with the objectives of the IMF deal, but added that the IMF and the current government generated the current crisis and are now responsible for reversing the “social catastrophe.”

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

Over $10 Trillion In Debt Now Has A Negative Yield

Over $10 Trillion In Debt Now Has A Negative Yield

NIRP is back.

On Friday, when Germany reported disastrous mfg and service PMI prints, the 10Y German Bund finally threw in the towel, with the yield sliding back under zero for the first time in three years. When that happened, and when the 3M-10Y yield curve inverted in the US right around that time, just over $400 billion in global debt changed the sign on its yield from positive to negative.

As a result, the total notional of global negative yielding debt soared on Friday, rising above $10 trillion for the first time Since September 2017, and which according to Bloomberg has intensified “the conundrum for investors hungry for returns while fretting the brewing economic slowdown.”

Paradoxically, the amount of negative-yielding debt has nearly doubled in just six months, and confirms that the global asset bubble is back because as Gary Kirk, a founding partner at London-based TwentyFour Asset Management, said “money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing.”

“This obviously tempts those investors holding cash to move along the maturity curve — or down the rating curve — to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”

Despite the Fed’s renewed herding of investors into the riskiest assets, Kirk is so far “resisting the temptation” to snap up longer-dated credit obligations that will be the first to default when the next recession hits, and prefers duration bets in interest-rate markets.

Others won’t be so lucky: as we noted last Friday, the ‘reverse rotation’, or flood into fixed income instruments, is accelerating and fund flows confirmed the fresh panic for yield just as the specter of QE4 returns as investors in the latest week parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to EPFR data.

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

Default Or Exit: A Battle Between Italy And The EU Is Inevitable

Default Or Exit: A Battle Between Italy And The EU Is Inevitable

Conte Salvini Maio

There is a dual Italian crisis brewing in the European Union. On the one hand, it is a political, or even geopolitical, crisis. Italy is undermining the unity of the European Union; blocking the EU’s recognition of those behind the coup in Venezuela as the legitimate authority; preventing the expansion of sanctions against Russia; and even supporting the ‘yellow vest’ movement in France, which is arousing the anger of the French government.

On the other hand, the crisis is economic in nature. Italy is once more sliding into a recession (economic growth was negative in the country); Italian banks are again facing financial problems; and the business media has already estimated that the Italian economic crisis could blow up the entire European banking system.

There is a strong possibility that the EU’s leaders will soon be faced with a choice: try to save Italy (and the whole of Europe) from yet another crisis or set an example by punishing the Italian government for the country’s independent economic and foreign policies. In turn, Italian Prime Minister Giuseppe Conte’s government will most likely have its own dilemma to deal with: bow down and sell its principles to get help from Brussels or go all out and regain Italian independence. The choice will not be easy and either decision will be painful. Neither ending to this Italian drama could really be called happy. As this headline in The Telegraph quite rightly notes: “Crisis brewing in Italy will lead to default, exit from the euro, or both.”

Conte Salvini Maio
Italian Prime Minister, Giuseppe Conte delivers his speech during the confidence vote for the new government at the Italian Senate. In the picture at left vice premier Luigi Di Maio and right vice premier Matteo Salvini, Italy, Rome, June 05, 2018

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

Secret Money for Private Armies – Catherine Austin Fitts

Secret Money for Private Armies – Catherine Austin Fitts

Investment advisor and former Assistant Secretary of Housing Catherine Austin Fitts says it looks like a “global recession is coming.” Is that going to cause the debt reset we’ve been hearing about for years? Fitts says, “Make no mistake about it, there is no reason for the federal government to default or monkey with any debt because they can literally print the currency. The question is how do they make sure whatever they are printing really holds any kind of store of value. I think the reason you are seeing them reengineer the federal bureaucracy and financial transactions infrastructure is because they want much greater and tighter control to do whatever they do, and that includes to continue to debase the currency. They could do this (reset) entirely by debasing the currency. . . . What we are watching . . . is essentially a coup. We had a financial coup, and now we are watching a legal coup to consolidate that financial coup. I would keep my eye on the fundamental governance structure of the U.S. The important thing is not what they do. The important thing is who controls no matter what they do. Now, we have created a mechanism for them to control entirely in secret and create policies entirely in secret, including around the back of a U.S. President. . . . It’s pirating by the ‘just do it’ method. I said to someone the other day, what is it about secret money for secret private armies that you don ‘t understand?”

$21 trillion in “missing money” at the DOD and HUD that was discovered by Dr. Mark Skidmore and Catherine Austin Fitts in 2017 has now become a national security issue. The federal government is not talking or answering questions, even though the DOD recently failed its first ever audit. Fitts says, “This is basically an open running bailout. Under this structure, you can transfer assets out of the federal government into private ownership, and nobody will know and nobody can stop it.

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

The Art of Defaulting

… the debt-financed overspending of the 1960s had continued into the early 1970s. The Fed had funded this spending with easy-credit policies, but by paying back its debts with depreciated paper money instead of gold-backed dollars, the U.S. effectively defaulted.

Ray Dalio

Principles for navigating big debt crises

Ray Dalio of Bridgewater Associates is one of my role models in life and, when he writes a new book, I would normally visit Amazon.co.uk more quickly than you can count to ten, but not this time!

What? Have I fallen out of love with Ray’s way of thinking? Not at all, but I found out that his new book – Principles for Navigating Big Debt Crises – can actually be downloaded for free. Ray, being the class act he is, has decided that everybody should know how to navigate a debt crisis; hence he has chosen to make it freely available (as a PDF copy).

Much (but not all) of the content below is inspired by Ray’s thinking. He is not as explicit in his new book as I am below (and as he has been before) in terms of the timing of the next debt crisis, but it’s pretty clear that he also thinks the writing is on the wall.

If you want to read the wise words of a very smart man, I suggest you give yourself one for Christmas, which you can do here. Christmas presents rarely come cheaper than this.

Debt crises of different sorts

In the following, I will focus on what Ray calls major debt crises – crises that have caused a slump in GDP of at least 3% but, in reality, there are different types of major debt crises.

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

The Italian people must understand that their country is at war

The Italian people must understand that their country is at war

The conflict between the European Union and Italy is a full-blown financial war. Euro countries cannot print their own money and for that reason they cannot have an endless deficit. Countries within the eurozone have to live within their means or else, without the intervention of the ECB, they will go bankrupt. Nobody knows the consequences of an Italian default and debt restructuring, but it can lead to the end of the euro.

To make the euro sustainable, the European financial elites want the Italians to reduce their spending and turn a budget deficit into a budget surplus. However, due to the country’s shrinking population the Italian budget deficit — as we have argued many times – can only increase. The European commission rejects the Italian budget because Rome wants to increase its debt far beyond the limit allowed by the ECB. “This is the first Italian budget that the EU doesn’t like,” wrote Deputy Prime Minister Luigi Di Maio on Facebook. “No surprise: This is the first Italian budget written in Rome and not in Brussels!”1)Matteo Salvini added: “This (the rejection of the Italian budget plan by the EU) doesn’t change anything.”. “They’re not attacking a government but a people. These are things that will anger Italians even more,” he said.2)

The country has entered a demographic winter3)and sustainable economic growth is simply impossible, at least for the foreseeable future. As is the case with the whole of Europe, the continent needs a plan to support an ageing and declining population. As if not aware of it, the Brussels-Frankfurt establishment only wants Italy to stick to their austerity program, i.e. decrease public spending and do away with the current Italian administration, which refuses to comply.

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

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

The defaults and currency crises in the periphery will then move into the core.

It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:

1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.

2. Bring demand forward by encouraging consumers to buy on credit now.Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.

3. Goose assets based on interest rates by lowering rates to near-zero. Bonds, stocks and real estate all respond positively to declining interest rates. Corporations that can borrow money very cheaply can buy back their shares, making insiders and owners wealthier. Housing valuations go up because buyers can afford larger mortgages as rates drop, and bonds go up in value with every notch down in yield.

This vast expansion of risk-assets valuations was intended to generate a wealth effectthat made households feel wealthier and thus more willing to binge-borrow and spend.

All those intended consequences came to pass: the global economy gorged on cheap credit, inflating asset bubbles from Shanghai to New York to Sydney to London. Credit growth exploded higher as everyone borrowed trillions: nation-states, local governments, corporations and households.

While much of the hot money flooded into assets, some trickled down to the real economy, enabling enough “growth” for everyone to declare victory.

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

China Cuts Reserve Ratio, Releases 1.2 Trillion Yuan Amid Rising Trade War, Record Defaults

China’s central bank announced it would cut the Required Reserve Ratio (RRR) for most banks by 1.0% effective October 15 for the fourth time in 2018, a little over three months after the PBOC announced a similar cut on June 24, as Beijing seeks to stimulate the slowing economy amid the growing trade war with the US, a slumping stock market, a sliding yuan and a record number of bond defaults.

The People’s Bank of China announced on Sunday local time that it lowered the required reserve ratio for some lenders by 1 percentage point according to a statement on its  website. The cut, which will apply to a wide range of banks including large commercial banks, joint stock commercial banks, city commercial banks, non-county rural banks and foreign banks, will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan will be used to repay existing medium-term funding facilities which are maturing, and the remaining RMB 750bn will help offset the seasonal rise in liquidity demand during the second half of the month due to tax payments, according to the PBOC.

But the real reason behind the RRR cut is that it is intended to boost sentiment before the onshore equity market re-opens on Monday after the week-long holidays, as well as to support liquidity conditions at a time when global interest rates have suddenly spiked to multi-year highs..

Commenting on the cut, Goldman economists said that while they had been expecting one RRR cut per quarter in H2, “the 1pp magnitude surprised us on the upside.”

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

“Something Has to Break” as China’s Onshore Defaults Hit a New Record

“Something Has to Break” as China’s Onshore Defaults Hit a New Record

Recent news from China has been really ugly.

But what can you expect? They’re trying to fight a trade war against the U.S. – deal with slowing growth – and survive against a stronger U.S. dollar.

And because of these problems – China’s major stock exchanges have really suffered this year.

But – contrary to what the mainstream says – I think things are going to get much worse. . .

For starters – the latest Chinese Manufacturing PMI (purchasing manager index) showed a continued downturn. Both in the NBS and Caixin Indexes.

Clearly the trade-war with the U.S. is being felt. And with little progress in negotiations between the U.S. and China – expect the near-and-midterm to continue being weak.

Now – Unfortunately – this slow down in the Chinese economy and the loss of sales and income are coming at a bad time. . .

Especially for their corporations.

The combination of a slowing economy, a stronger dollar, and a tightening Federal Reserve is putting pressure on indebted Chinese firms.

This is putting China’s elites between a rock and a hard place. . .

That’s because with the trade-war raging on and a tightening Fed – the Communist Party of China will want to ease and help their economy.

The Peoples Bank of China (the Chinese central bank) can cheapen the yuan to try and boost exports. And as I wrote before – the weaker yuan will offset Trump’s tariffs.

For example – if the U.S. places 20% tariffs on all Chinese goods – China simply must devalue the Yuan by 20%. This would offset the increased costs from the tariffs – keeping the price for U.S. consumers unchanged. Basically rendering the imposed tariff worthless.

But the problem with this is Chinese firms have significant dollar-denominated debts. So a stronger dollar makes their debt-burden much harder to service.

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

In Shock Move, India Nationalizes Giant Shadow Bank At Center Of Market Rout

One week after we reported that India’s NPL crisis finally erupted after IL&FS, a major shadow bank at the heart of India’s economy defaulted in one day on three debt payments, India’s government announced on Monday that it would immediately seize control of a shadow lender whose defaults have caused widespread upheaval at mutual funds.

The nationalization is virtually unprecedented: the nation’s corporate affairs ministry has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services in 2009. A bid by the government to take control of debt-laden realty firm Unitech in late 2017 was stalled by the Supreme Court after the move was challenged.

According to Bloomberg, officials ousted Infrastructure Leasing & Financial Services Ltd.’s entire board and a new six-member board will meet before Oct. 8, the National Company Law Tribunal said on Monday. India’s richest banker Uday Kotak and ICICI Bank Chairman G.C. Chaturvedi will be part of the proposed board, which will elect a chairperson themselves.

An AAA-rated entity for decades, over the last few years IL&FS, saw an increase in its debt levels. The situation worsened in the last two months with both the parent company and its subsidiaries defaulting on a number of repayment obligations. Banks and insurance companies have the largest exposure to IL&FS.

For India to resort to such a dramatic move, the panic must have been palpable: the nationalization, which unfolded within the span of a hectic day in Mumbai, underscores the government’s concern about IL&FS’s defaults spreading to other lenders in the world’s fastest-growing major economy.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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