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The US Corporate Debt Bomb, Europe’s Recession, and Systemic Risk in China
The US Corporate Debt Bomb, Europe’s Recession, and Systemic Risk in China
Yesterday’s note caught a lot of attention.
In it, we argued that investing in stocks today based on the Fed getting dovish is like buying stocks after the Bear Stearns deal: you’re buying based on a development that reveals the financial system is in serious trouble.
Remember, the Fed didn’t become dovish for no reason… it because dovish because it sees systemic risk on the horizon.
Corporate America is perched atop a debt bomb of $10 trillion, of which roughly 1/3rd is junk… meaning unlikely to be paid back.
Rather than issuing debt to build factories or expand operations, these companies have been issuing debt to buy back shares, resulting in the system being MORE leveraged today than it was in 2007.
Over $700 billion of this debt comes due this year… at a time when 60% of US companies already have NEGATIVE cash flow.
Put another way, the debt is coming due at a time when most companies don’t have the money to pay it back.
Outside of the US, Europe is teetering on the brink of recession, with the latest industrial production numbers showing a year over year decline of 4.2%. This is the largest collapse since 2009, at the depth of the Great Financial Crisis.
Then there’s China, where despite claims to the contrary, the entire system is collapsing. The Central Bank of China just engaged in the largest liquidity pump of all time last month… meaning it spent MORE money propping up the system in January 2019 than it did at any point in 2008.
If things are fine in China, why is it doing this?
Again, structurally the global financial system is in SERIOUS trouble. Buying stocks today based on the idea that the Fed is not as hawkish as before is like buying stocks because of the Bear Stearns deal.
And deep down, the market knows it.
…click on the above link to read the rest of the article…
A Glimpse At 2019
Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps Systemic Risk go unattended and build further up. For the first time in a while, elusive economic narratives started to fail at blaming market weakness on secondary-order factors: Trade Wars, the FED, Oil prices. Attempts at dismissing market events as no more than a temporary turbulence miss the bigger picture and cast the fishing net on unaware investors looking for a dip to buy. In contrast, over the last month, conventional market and economic indicators (e.g. breaks of multi-year equity & home price trend-lines, freezing credit markets, softening global PMIs/orders) have all but confirmed what non-traditional measures of system-level fragility signalled all along: that a market crash is incubating, and the cliff is near. Nothing has happened yet.
1. Early Tremors, Not Market Bottoms
2. Elusive Narratives Fail, Unveiling a Deeper Malaise
3. Mainstream Investment Strategies Face a Tougher New Year
4. Triggers For Market Chaos: A Timeline For 2019
Early Tremors, Not Market Bottoms
After a slow start, the season of market chaos has taken off.
In the last few months, global markets have visibly entered the ‘phase transition zone’, a process of critical transformation that will eventually lead to a new equilibrium at significantly different levels, after severe ruptures and a possible full-cycle market crash.
Rather than ‘a short-term correction in a structural bull market’, or a ‘temporary turmoil in healthy economic conditions’, this is the beginning of a structural adjustment after a decade of liquidity abundance and market manipulation, which reflexively changed the structure itself of the market for private investors in hazardous ways, making it insensitive to fundamentals, passive or quasi-passive, overly-correlated and overly-concentrated.
…click on the above link to read the rest of the article…
Never Mind Volatility: Systemic Risk Is Rising
Never Mind Volatility: Systemic Risk Is Rising
So who’s holding the hot potato of systemic risk now? Everyone.
One of the greatest con jobs of the past 9 years is the status quo’s equivalence of risk and volatility: risk = volatility: so if volatility is low, then risk is low. Wrong: volatility once reflected specific short-term aspects of risk, but measures of volatility such as the VIX have been hijacked to generate the illusion that risk is low.
But even an unmanipulated VIX doesn’t reflect the true measure of systemic risk, a topic Gordon Long and I discuss in our latest program, The Game of Risk Transfer.
The financial industry has reaped enormous “guaranteed” gains by betting against volatility. As volatility steadily declined over the past two years, billions of dollars were reaped by constantly betting that volatility would continue declining.
Other “guaranteed” trades have been corporate buybacks funded by cheap credit and passive index funds Central bank policies–near-zero interest rates and “we’ve got your back” asset purchases that made buying every dip a no-brainer trading strategy–have changed as banks attempt to dial back their stimulus and near-zero rates, and as a result volatility cannot continue declining in a nice straight line heading toward zero.
Higher interest rates have introduced a measure of uncertainty in another “guaranteed gains” trade–betting that interest rates would continue declining. All of these trades were “guaranteed” by central bank stimulus and intervention. In effect, price discovery has been reduced to betting that central banks will continue their current policies–‘don’t fight the Fed.”
Now that central banks have to change course, certainty has morphed into uncertainty, and risk is rising, regardless of what the VIX index does on a daily basis.
…click on the above link to read the rest of the article…
Draghi Speech: Everything Is Awesome In Europe, No Signs Of Systemic Risks
Draghi Speech: Everything Is Awesome In Europe, No Signs Of Systemic Risks
Mario Draghi gave the keynote speech at the Frankfurt European Banking Congress this morning in which he focused on the strong outlook for the Eurozone economy and how his monetary policy is playing a vital role. The speech was peppered with upbeat phrases and adjectives like solid, robust, unabated, endogenous propagation, resilient, remarkable and ongoing. According to Draghi.
The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward.
Draghi is confident that future growth will be unabated for three reasons.
- Previous headwinds have dissipated;
- Drivers of growth are increasingly endogenous rather than exogenous; and
- The Eurozone economy is more resilient to new shocks.
In terms of previous headwinds, Draghi notes that global growth and trade have recovered, while the eurozone has de-leveraged.
For some years global growth and world trade have been a drag on the recovery. Now, we are seeing signs of a sustained expansion. Global PMIs remain strong. The share of countries in which growth has been improving relative to the previous three years has risen from 20% in mid-2016 to 60% today. And this has fed through into a rebound in world trade, which is growing at its strongest annual rate in six years, and may well become a tailwind going forward.
Domestically, a key headwind in the past has been the necessary deleveraging by firms and households. But this is also now diminishing as debt returns to more sustainable levels.
…click on the above link to read the rest of the article…
Corruption, resources, climate and systemic risk
Corruption, resources, climate and systemic risk
Corruption is a loaded word. One person’s corruption is another’s sound social policy. Some people believe providing unemployment benefits to laid-off workers corrupts them by making them “lazy.” Many others think such benefits are sound social policy in an economic system that is prone to major cyclical ups and downs.
Fewer people agree that bailing out major U.S. banks at taxpayer expense in the aftermath of the 2008 crash was a good use of public money. An alternative would have been for the U.S. government to seize the banks, inject funds to stabilize them, and then resell them to investors, perhaps at a profit.
Was it corruption that led to the bailout instead of a takeover? Or was it an honest difference of opinion about what would work best under emergency circumstances?
We can argue whether these examples of transfers of funds from one group to another are fair. But by themselves they do not constitute a systemic risk to the stability of the entire economic and social system. In fact, some would argue that such transfers enhance that stability. However one evaluates these transfers, I would contend that a much worse corruption is to subject our society knowingly to systemic failures such as severe climate change and widespread crop failures.
To understand this contention, we must review the material basis for our modern society. Despite all the hype about the service economy, the activities which make the service economy even possible are agriculture, fishing, forestry, mining and manufacturing. These sectors create the surplus food and fiber, the surplus energy and minerals, and the surplus goods that allow so many of us to do something other than farm, fish, log, mine or manufacture goods.
…click on the above link to read the rest of the article…
Rising Systemic Risk for all Markets
We are on the precipice of what can only be described as rising systemic risk for all markets. The Fed is now hinting that banks should prepare for NEGATIVE INTEREST RATES and this insanity of following the crowd is undermining the entire world economy. The increasingly unstable footing that we find ourselves standing upon is reflected in widening credit spreads demonstrating that CONFIDENCE is indeed collapsing. The EU Commission will no longer classify government bonds in bank balance sheets as “risk”. Banks would also have government bonds on par with “equity” yet government bonds have proven to be risky and are inferior to what would in some financial institutions result in an increased capital requirement. Turning to Goldman Sachs, we see the so called world’s greatest trader closed out its long-USD trade against a basket of Euro and Japanese yen with a potential loss of around 5% which is being bantered about on the street showing they too got this all wrong. This early 2016 destabilization is stopping out short gold positions but not replacing them with any buying conviction while the Euro trade of long Italian 5 year against short German 5 year has also turned into a blood-bath as the Euro finally rallied begrudgingly to reach our first resistance target in the mid-113 area.
Global economic growth has been anemic at best in the States but it is clearing turning down since 2015.75. This new world order of NEGATIVE INTEREST RATES is so insane and focused solely on trying to stimulate borrowing, it is undermining pensions and the elderly creating an economic storm of the century on the horizon, which is far worse that the Great Depression of the 1930s. Even the Japanese 10 Year bond has gone NEGATIVE demonstrating the total collapse in CONFIDENCE.
…click on the above link to read the rest of the article…
The Global Economy Could Fall Farther and Faster Than Pundits Expect
The Global Economy Could Fall Farther and Faster Than Pundits Expect
Systemic fragility doesn’t respond to central bank jawboning or Keynesian claptrap; unlike those “policy tools,” fragility is real.
The core narrative of central bank/cartel capitalism is centralized agencies have the power to limit downturns and extend credit-based “good times” almost indefinitely. The centralized power bag of tricks includes fiscal policies such as deficit spending to boost “aggregate demand” in downturns and monetary policies such as lowering interest rates to zero and buying assets, a.k.a. quantitative easing.
If we crawl under the barbed wire and escape the ideological Keynesian Concentration Camp, we find thinkers such as Ugo Bardi, John Michael Greer and Dimitry Orlov, whose work explores the dynamics of collapse, resilience and sustainability.
All three have added a great deal to my own (emerging) understanding of the many dynamics of collapse.
We can summarize the dynamics of collapse in many ways; here’s one: collapse is latent fragility manifesting. A familiar (and tragic) health analogy offers an example: a middle-aged man doesn’t appear ill, a bit thick around the middle perhaps, but neither he nor his intimates can see the fragility of his clogged arteries and blood-starved heart. Seemingly “out of the blue,” the man has a massive heart attack and passes from this Earth, to the shock of everyone who knew him.
Financial collapse isn’t “out of the blue,” any more than a heart attack is “out of the blue.” Actions and choices have consequences, and as resilience and redundancy are slowly stripped from complex systems, systemic fragility builds beneath the surface. At some difficult-to-predict point, a threshold is reached and the complex system fails.
In the financial realm, fragility builds as the system relies ever more heavily on marginal lenders, borrowers, buyers and investments for its “growth.”
…click on the above link to read the rest of the article…
Like sheep to slaughter: You still aren’t grasping the systemic risk in the stock market (or else you would have sold everything already)
(NaturalNews) If you still own stocks and mutual fund shares, you still aren’t grasping the systemic risk in the stock market. No matter what you claim to BELIEVE, it is your ACTIONS that actually determine your true grasp of reality. Failing to sell all your stock holdings right now could result in massive losses as the world’s bubble markets continue with an implosion that could wipe out 50% of current valuations for many stocks.
The massive market bubble currently in place has been propped up by a steady stream of fiat money being printed by the Federal Reserve and handed out to banksters who have ties to Washington. This, combined with near-zero interest rates, is the only thing propping up the bubble market (and creating the illusion of economic prosperity).
High-tech companies are back into bubble territory with unrealistic valuations based on hype and vapor. Meanwhile, the corrupt mainstream media continues to lie to the gullible public, telling them the market can only go UP… even as it careens on the verge of systemic collapse.
The coming market collapse will be the largest in human history
The systemic nature of the global banking system and its insane derivatives debt means the next collapse will be a SYSTEMIC firestorm that’s unstoppable and absolutely devastating. Pensions, bank accounts, investment funds, bonds and much more will be nearly wiped out, and the corrupt, criminal government regime will make sure everyday Americans are the ultimate losers when the dust settles.
The systemic nature of the global banking system and its insane derivatives debt means the next collapse will be a SYSTEMIC firestorm that’s unstoppable and absolutely devastating. Pensions, bank accounts, investment funds, bonds and much more will be nearly wiped out, and the corrupt, criminal government regime will make sure everyday Americans are the ultimate losers when the dust settles.
The pathetically stupid and dishonest financial media is desperately running stories right now to maintain false faith in the markets, even while their own people are behind the scenes selling like mad.
…click on the above link to read the rest of the article…
US Bank Counterparty Risk Soars After Energy MTM Debacle
US Bank Counterparty Risk Soars After Energy MTM Debacle
A few dots are starting to be connected now that we have exposed the debacle of The Fed’s decision to allow banks to mark-to-unicorn their energy loans. “Something” was wrong in recent weeks as the TED-Spread surged (implying rising counterparty uncertainty among banks) and then the last week – since The Fed’s alleged meeting with banks – has seen financial credit and stocks crash.
Coincidence? We don’t think so. In the week since The Fed gave the nod to banks to hide losses on energy loans, credit risk has spiked and stocks tumbled…
It is clear banks are hedging against one another’s systemic risk.
Simply put, it’s 2008 all-over-again as “when in doubt, sell ’em all” is back for the US financial system. When you know/question one bank (or some banks) is not transparent in their loan losses (and implicitly their capital ratios) then contagion (and collateral chains) tells any good fiduciary to sell them all – and the banks themselves will enable a vicious circle as they hedge.
And of course, the unintended consequence of The Fed’s decision to enable cheating in the banks’ energy loans is a surge in financial system instability as banks and the price of oil now become systemically more coupled.
Watch Carefully as Dangerous Economic Times Approach: “Nothing but Black Swans Ahead”
Watch Carefully as Dangerous Economic Times Approach: “Nothing but Black Swans Ahead”
USA Watchdog’s Greg Hunter interviewed investment expert Jeff Berwick on the ominous signs headed our way in the near future, and in particular, in the month of September.
Berwick has, like so many other voices, been on the forefront of warning about the instability of markets ahead, and during the seven year cycle of Shemitah, that it would unwise to ignore their warnings and prepare for a potential market crash.
Whatever does or doesn’t happen in the days and weeks ahead, it has become all too clear that the system is teetering on the edge, and the powers that be are doing all they can to keep the illusion going, and keep the public under the spell that everything is fine.
But as we have all known since nursery school, once the thing cracks and falls apart, even all the king’s men can’t put the thing back together again.
Keeping the music playing while the chairs are rearranged for collapse is more a way of making an orderly exit for the members of the Ponzi scheme than it is any kind of way of repairing the damage or creating a viable economy.
With black swans on the horizon, it is indeed time to beware, and watch the path ahead.
Manipulation = Fragility
Manipulation = Fragility
In markets distorted by permanent manipulation the most powerful incentive is to borrow as much money as you can and leverage it as much as you can to maximize your gains in risk-on asset bubbles.
A core dynamic is laying waste to global financial markets: the greater the level of central bank/government manipulation, the greater the systemic fragility.
There are a number of moving parts to this dynamic of steadily increasing fragility.One key characteristic of this fragility is that it invisibly accumulates beneath the surface stability until some minor disturbance cracks the thinning layer of apparent stability. At that point, the system destabilizes, as it has been hollowed out by ceaseless manipulation, a.k.a. intervention.
One is that any system quickly habituates to the manipulation, that is, the system soon adds the manipulation to its essential inputs.
For example: if you lower interest rates to near-zero, the system soon needs near-zero interest rates to remain stable. Raising rates even a mere percentage point threatens to fatally disrupt the entire system.
Another is that permanent intervention (i.e. manipulation, or to use a less threatening word, management) strips the system of resilience. When participants are rescued from risk by central bank/central state authorities, they take bigger and bigger gambles, knowing that if the bet goes south, the central bank/state will rush to their rescue.
One of the core sources of resilience is a healthy fear of losses. If you’re going to face the consequences of your actions and choices, prudence forces you to either hedge your bets or diversify very broadly, so if bets in one sector go south you won’t be wiped out.
Thanks to the permanent manipulation of central banks and states, trillions of dollars have concentrated in high-risk, high-yield carry trades that are now blowing up.
…click on the above link to read the rest of the article…
