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Global Recession “Appears Inevitable” – Guggenheim’s Minerd Fears Cascading ‘Butterfly Effect’
Global Recession “Appears Inevitable” – Guggenheim’s Minerd Fears Cascading ‘Butterfly Effect’
In January, Guggenheim CIO Scott Minerd warned that ultimately, markets will need to reprice for this rising risk with increased bond spreads relative to Treasury securities. However, that day of reckoning when spreads rise is being held off by the flood of central bank liquidity and international investors fleeing negative yields overseas.
And let’s not forget downgrade risk of BBBs: today 50 percent of the investment-grade market is rated BBB, and in 2007 it was 35 percent. More specifically, about 8 percent of the investment-grade market was BBB- in 2007 and today it is 15 percent. It has more than quintupled in size outstanding, from $800 billion to $3.3 trillion. We expect 15–20 percent of BBBs to get downgraded to high yield in the next downgrade wave: This would equate to $500–660 billion and be the largest fallen angel volume on record—and would also swamp the high yield market.
Ultimately, we will reach a tipping point when investors will awaken to the rising tide of defaults and downgrades. The timing is hard to predict but this reminds me a lot of the lead-up to the 2001 and 2002 recession.
Coronavirus Unlikely to Cause U.S. Recession, BridgePark’s Selig Says
The prolonged period of tight credit spreads experienced in the late 1990s lulled investors into unwittingly increasing risk at a time they should have been upgrading their portfolios.
This brings to mind the famous observation by economist Hyman Minsky, who stated that stability is inherently destabilizing. That is to say that long periods of relative stability in risk assets causes investors to keep upping the risk during a long period of calm.
Ultimately, this leads to what he called a Ponzi Market where the only reason investors keep adding to risk is the fear that prices will be higher tomorrow (or in the case of bonds, yields will be lower tomorrow).
…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…
Silver Prices Likely To Go “Exponential” – Guggenheim Co-Founder
Silver Prices Likely To Go “Exponential” – Guggenheim Co-Founder
◆ Silver prices are likely to go “exponential again” according to Guggenheim Partners co-founder Scott Minerd, in an interview with Bloomberg at Davos (see silver chart and interview below)
◆ Silver is “the number one conviction trade in 2020” Minerd, who is also the Guggenheim Global Chief Investment Officer (CIO) told Bloomberg whose conviction trade was greeted with surprise by Bloomberg’s Tom Keene and Jonathan Ferro
◆ Silver has more room to run and there is a “strong probability” that silver will go “exponential” again according to Minerd
◆ “When you look at the relative values of silver and gold, silver is about 65% below its prior peak while gold is very close to its prior peak”
◆ Financial markets and assets are a central bank fueled ‘ponzi scheme’ warned Minerd who is concerned about the huge rally seen in bond and particularly stock markets
…click on the above link to read the rest of the article…
Guggenheim’s Minerd Warns Of A Nearing ‘Minsky Moment’ That Could “Reset” Asset Prices
Guggenheim’s Minerd Warns Of A Nearing ‘Minsky Moment’ That Could “Reset” Asset Prices
Guggenheim Partners’ Scott Minerd warned in a new market outlook titled “From the Desk of the Global CIO: Risk and Reward of Successful ‘Mid-Cycle’ Rate Cuts” that recent 75bps rate cuts by the Jerome Powell–run Federal Reserve had created a similar environment today to 1998 when central banks created a “liquidity-driven rally that caused the Nasdaq index to double within a year before the bubble finally burst.”
The 1998-scenario has already been playing out through 2019, as shown in the chart below, with global central banks plowing liquidity into financial markets.
Minerd suggests that a Minsky moment could be nearing as a period of financial distortions will eventually be unwound in a very violent fashion.
Minerd wasn’t entirely clear how long the Fed’s bubble-blowing could last but said today’s environment will eventually “lead to a significant widening of credits.”
Minerd said he’d already taken pre-emptive action to “preserve capital” for the inevitable correction in risk assets: “Thus, while the Fed has prolonged the expansion, the reality is that it is also the start of silly season in risk assets. By heeding the lessons of the past we continue to position defensively so that we can preserve capital and be prepared to take advantage of opportunities when asset prices inevitably reset.”
He said cracks have already started to surface in the corporate debt markets. In particular, the spread between the high-yield debt and government debt, indicate tighter spreads have pushed investors extremely far out on the risk curve at a time where they need to be more defensive.
He said the best strategy to navigate markets today is “capital preservation in a market where the risk/reward trade-off looks unattractive in many credit sectors.”
…click on the above link to read the rest of the article…
The Fed Should Hike Interest Rates, Not Cut Them
The Fed Should Hike Interest Rates, Not Cut Them
In the runup to the Federal Reserve’s Open Market Committee meetings on July 30 and July 31, policy makers are debating the value of what would normally be considered unorthodox policy actions. The consequences of the Fed’s actions in the next week—the U.S. central bank is expected to cut interest rates by a quarter of a percentage point—could be with us for much longer than we think, culminating in the next recession and increasing the risk to financial stability.
In the meantime, the Fed could be delivering yet another sugar high to the economy that doesn’t address underlying structural problems created by powerful demographic forces that are constraining output and depressing prices.
By almost every measure, policy makers should be considering another rate hike, not a rate cut, in anticipation of potential economic overheating from looming limitations on output. Instead, debate has been focused on the need to take preemptive action to avoid a potential slowdown.
An abrupt shift in thinking was set in motion last December when, after raising overnight rates by a quarter of a percentage point, Fed Chairman Jerome Powell signaled more hikes would come and that balance-sheet reduction was on “autopilot.” Alarmed by the market tantrum that ensued, Fed policy makers began a mop-up campaign that included the Fed’s now-famous “pivot” to patience.
While the Fed has more than succeeded in stabilizing markets, the ensuing liquidity-driven rally in various markets has boosted asset prices, including stocks, bonds, precious metals, energy, and even cryptocurrencies.
As Europe faces prospects that negative rates might become a long-term fixture in the euro region, concerns are mounting in the U.S. that a global slide toward negative yields could infect the market for Treasury securities, should the U.S. slip into a recession. These concerns are well founded.
…click on the above link to read the rest of the article…
