Month: December 2018

Former Dallas Fed official Danielle DiMartino Booth joins the show just as Chairman Jay Powell faces his first major challenge: will he keep raising rates as promised now that autos, housing, employment, and even tech stocks look soft? And if not, will he effectively signal that the US economy is in big trouble?

“I’m most concerned about the bottom line evaluations in the corporate debt market…these bring back memories of the sub-prime credit crisis…”  

“The corporate bond market has doubled since 2007. It is over 9 $trillion. Subprime loans were 3 trillion… The Fed should be calling out potential financial stability risks. That is the unspoken third mandate.“

It looks like the US credit market is about to hit the wall. US wall of maturity is around 2020 to 2022, acc to calculations by SRP. pic.twitter.com/j1Sv5ewWjk

— Holger Zschaepitz (@Schuldensuehner) December 2, 2018

“Apparently in six weeks we have come “worlds apart from neutral” to “Just under” and that is when markets really, really took off.”

“The Fed could engineer a soft landing, but it is a rare occurrence and as Powell is learning, there is a lagged effect in terms of when those interest rate hikes are put in and when they show up in the economy.”

“Powell is trying to broadcast that he is truly data dependent…‘if the data change, I’m going to change with the data.'”

“…look across energy, manufacturing, real estate & construction, leisure & hospitality states…jobless claims across all of these sectors have turned up. It is a weakening economy…”

“If the economy is truly slowing, then top line growth will slow, earnings expectations will be ratcheted down going into 2019.  Those are things that the stock market will not like.”

DiMartino Booth and Jeff Deist discuss Powell’s performance to date, the credulity of the financial press, the ugly ticking time bomb of US corporate debt, and whether Austrians and permabears overestimate the Fed’s influence on the economy.

via RSS https://ift.tt/2Q6qmmS Tyler Durden

As one of his first acts in office, Mexican President Andres Manuel Lopez Obrador and his counterparts from three Central American countries have signed an agreement to formulate a plan which will stop the flow of migrants seeking asylum in the United States.

The plan will include a fund to generate jobs in the region, while attacking the “structural causes of migration from El Salvador, Guatemala and Honduras,” reports AP, citing a Saturday statement from Mexico’s Foreign Ministry.   

Thousands of mostly Honduran migrants have banded together in caravans over the last two months, making the northward journey through Mexico towards the southern US border. 

The majority of the most recent Central American migrant caravan has gathered in Tijuana, where authorities just cleared around 6,000 asylum-seekers out of an outdoor sports complex close to the US border – moving them to a former concert venue around 14 miles away from the San Ysidro border crossing. The first shelter was closed due to sanitation issues according to the city. 

Experts had expressed concerns about unsanitary conditions that had developed at the partly flooded sports complex, where the migrants had been packed into a space adequate for half their numbers. Mud, lice infestations and respiratory infections were rampant. –Washington Times

Tijuana authorities had previously said nobody would be forced to move to the new facility, however they warned that they would not longer provide free food and medical services at the Benito Juarez sports complex. 

The move comes one week after approximately 500 migrants broke off from a peaceful protest over long wait times for asylum applications, and made a run towards the US border, resulting in the deployment of tear gas by US border officials. 

via RSS https://ift.tt/2rjgK9D Tyler Durden

Authored by Mac Slavo via SHTFplan.com,

The world’s science academics are saying that the global food supply system is completely broken. They say that in order to avoid a “climate catastrophe” the global population should overhaul the farming system and eat less meat.

Billions of people worldwide are either underfed or overweight. The current food system fails to properly nourish all of these people. And that is currently driving the planet towards a climate catastrophe, according to 130 national academies of science and medicine across the world. More than 820 million people went hungry last year, according to the United Nations Food and Agriculture Organization, while a third of all people did not get enough vitamins. At the same time, 600 million people were classed as obese and 2 billion overweight, with serious consequences for their health. On top of this, more than 1 billion tonnes of food is wasted every year, a third of the total produced.

“The global food system is broken,” said Tim Benton, professor of population ecology, at the University of Leeds, who is a member of one of the expert editorial groups which produced the report. He said the cost of the damage to human health and the environment was much greater than the profits made by the farming industry.

“Whether you look at it from a human health, environmental or climate perspective, our food system is currently unsustainable and given the challenges that will come from a rising global population that is a really [serious] thing to say,” Benton said.

And while these are all horrible problems, without vast reductions in individual freedom and liberty (such as the liberty to decide what to eat and how much) the problem won’t resolve.  Solutions are, of course, more totalitarian intervention to save people from themselves.

For example, another member of the IAP editorial group, Aifric O’Sullivan, from University College Dublin, said:

“We need to ensure that policymakers inform consumers about the climate impacts of their food choices, provide incentives for consumers to change their diets, and reduce food loss and waste.” 

But information hasn’t changed minds yet, or the American population would not be mostly overweight or obese.

According to The Guardian, the global food system is responsible for one-third of all greenhouse gas emissions, which is more than all emissions from transport, heating, lighting, and air conditioning combined. The global warming this is causing is now damaging food production through extreme weather events such as floods and droughts, said scientists involved in a new report. Providing a healthy, affordable, and environmentally friendly diet for all people will require a radical transformation of the system, says the report by the InterAcademy Partnership (IAP). This will depend on better farming methods, wealthy nations consuming less meat, and countries valuing food which is nutritious rather than cheap.

The report, which was peer-reviewed and took three years to compile, sets out the scale of the problems as well as some potential solutions. Of course, thanks to lobbying, don’t expect much to change. Suggestions and solutions include convincing (or forcing through threats of violence/legislation) people to eat less dairy and meat products. Other potential solutions include crops that are more resilient to climate change, smarter crop rotation, soil protection, better use of fertilizers, and lowering the use of pesticides. It also backs innovation such as laboratory-grown meat and insect-based foods.

via RSS https://ift.tt/2PfhshN Tyler Durden

Major drug dealers on the dark web have begun to voluntarily ban the synthetic opioid fentanyl, deeming it “too dangerous” to trade, according to The Guardian. 

Those trading on the digital black-market have been “delisting” the supercharged painkiller blamed for an estimated 30,000 drug overdose deaths in 2017 – classifying it along with fully automatic firearms and explosives that are considered too high risk to trade. 

Fentanyl is up to 100 times stronger than heroin. 

“If they’ve got people selling very high-risk commodities then it’s going to increase the risk to them,” said Vince O’Brien of the UK’s National Crime Agency (NCA). “There are marketplaces that will not accept listings for weapons and explosives – those are the ones that will not accept listings for fentanyl. Clearly, law enforcement would prioritise the supply of weapons, explosives and fentanyl over, for example, class C drugs – and that might well be why they do this.”

O’Brien added: “There are also drug users on the dark web who say on forums that they don’t think it’s right that people are selling fentanyl because it is dangerous and kills a lot of people.”

One type of fentanyl, carfentanyl, is thousands of times stronger than heroin and O’Brien confirmed that police had made a number of small seizures of the substance in the UK. In the US, fentanyl has taken a significantly more profound hold on the drugs sector and has replaced heroin in many major US drug markets, precipitating a more deadly phase of the nation’s opioid epidemic. The number of overdose deaths associated with fentanyl and similar drugs has grown to more than 29,000 a year, from 3,000 five years ago. Deaths were up by more than 45% in 2017. –The Guardian

According to O’Brien, the NCA is working with US law enforcement agencies to try and stave off a similar fentanyl epidemic. 

“We are working closely with international partners in terms of how the threat developed there. It’s an emerging new drug, a threat we’re taken very seriously because of what happened in the US,” added O’Brien. “Every time we take down a dark web vendor we follow up with customers, and when we have done that, a number are turning up dead – there’s a real cautionary tale there.” 

The NCA has scored several victories against UK fentanyl dealers – which typically acquire the drug from China before selling sell it on the dark web.

The first fentanyl case to be sentenced in the UK involved Kyle Enos, 25, from Newport who was jailed for eight years in February. Enos had procured the narcotic from China, selling it worldwide and to customers in 30 UK police areas. –The Guardian

NCA investigating officer Colin Williams said “We realized within a number of hours we had to deal with this very quickly.” When they tracked down approximately 160 customers of Enos’s, they found that four of them were already dead. “We can’t say whether they took the drug but they were certainly on his [customer] list,” said Williams. 

Last year the largest underground fentanyl marketplace, Alphabay, was shut down following a global police investigation. After several more have met similar fates, it appears that the deadly opioid is simply too hot to handle. 

via RSS https://ift.tt/2riT84I Tyler Durden

Authored by Gregory  Morin via The Mises Institute,

I recently had the opportunity to visit San Francisco for the first time. Coastal towns tend to be a bit more interesting in terms of cuisine (seafood being one of the more varied palate options) as well as architecture (steep hill structures are ever a testament to human ingenuity) and San Francisco scores high in both categories.

However one area where it currently scores quite low is in the aroma zone. At first I thought perhaps they had a very inefficient sewer system near the shoreline retail sector, but as we explored deeper toward the city center it became clear something was amiss. I learned shortly thereafter that San Francisco has a poop crisis.

To be blunt — people are literally crapping on the sidewalks. Not the tourists, mind you, but the local homeless population. The situation has come to a head (or to the head to employ a nautical metaphor) primarily as a result of progressive conservatism primed with the power of centralized (governmental) authority.

The outside leftist narrative of course is that this poop crisis is inevitable results of unmitigated capitalism, which drives the eternal boogeyman of income inequality. This inequality fuels gentrification of the San Francisco housing market (no, actually property taxes are the prime driver of gentrification – if you own your home absent property tax you would never need to sell due to rising prices). So as housing becomes ever more “unaffordable” people are forced out of their homes and onto the street. This is of course complete nonsense.

Prices only go up if supply is constrained while demand is rising. So in order to discover why supply is constrained we turn our attention toward the “inside” leftists (that is, the progressive liberals who live there). It turns out those that live there are in fact quite conservative (even if they don’t realize it). Any attempted new housing project must pass not only governmental hurdles but also the “local input” of current residents. These residents walk and talk like social progressives but because one of their core tenets is that they do not want the flavor, character, or architecture of the area in which they live to change — that is, they want to conserve it in perpetuity — this by definition makes them conservatives in that arena. Their dual desire to not only keep San Francisco locked in an eternal snow globe style stasis but to also not erode the value of their homes drives them to engage in this very destructive economic protectionism: keeping newcomers out by making it virtually impossible (or more costly than necessary) to build, keeps the value of their own homes artificially elevated while preserving the Norman Rockwell character of their town.

To fully appreciate the extent of the damage they are causing and why perhaps more than anywhere else in the country the homeless problem is so acute is that the median price of a modest single family home now stands at $1.6 million. A family of four with a household income of $100k is considered at the poverty line and actually qualifies for assistance from HUD (let that sink in — taxpayers across the country are subsidizing the housing of people making a $100k/year).

So what is the solution? Always the same and likewise always decried as “unrealistic” – remove all housing regulations and obstacles and let anyone build anything anywhere (works just fine in Houston, Texas, thank you very much). Your neighbor has no right to say what you can do with your property. Progressives (yes, I’m looking at you “townies” in Athens, Georgia) should stop blocking progress when it comes to housing and development.

via RSS https://ift.tt/2FVea3A Tyler Durden

Submitted by Eric Peters, CIO of One River Asset Management

Stockholm:“How should we think about inflation?” asked the Strategic Asset Allocation Committee. “Is inflation something that should have been much lower were it not for such low interest rates and so much QE? Because if that is so, won’t policy normalization cause deflation? Or has QE created disinflation? Because if it has, won’t its reversal create inflation? How will politics affect inflation? And what should we think of Trump? Who will come next? A socialist? Is Fed independence under attack? And what are we to make of your trade conflict with China?”

Stockholm II:“Our conflict with China is about far more than a trade deficit,” I explained. “It is about slowing China’s rise, economically, militarily. Confronting them on intellectual property, market access.” The committee agreed. “US and EU policy, business, and military circles all seem to believe that this is necessary, overdue, but many are offended by our approach.” The Swedes agreed. “What would have happened if the US had tried to coordinate its European allies to confront China in a multi-lateral way?” I asked them. “Nothing,” they said. And I agreed.

Stockholm III: “US markets are priced for roughly 2% or less inflation every year for 30yrs,” I said. In a world of extraordinary debt, rising deficits, and impossible entitlement liabilities, pricing low and stable inflation when governments print money seems a poor bet.

“Electorates are voting for higher wages, greater income security, less trade and immigration – more balanced division of economic profits between labor and capital. And if the current parties do not deliver this result, they will be replaced by parties that will lift inflation through socialist redistribution.”

Copenhagen: “We’re looking for good diversifying strategies,” said the CIO. I’d come to show him ours. “We own gamma and use risk premia to offset the carry,” continued the Dane, acknowledging risk premia strategies are negatively convex. But with 10yr German bunds yielding 30bps, Europe’s risk-free hedge is dead. The hunt for alternatives is on. “We increasingly buy US Dollars to hedge our risk. As Europeans, the dollar pays us 3% to hold and tends to rise when markets fall.” But the dollar is no longer cheap. And Americans want it lower.

Helsinki: “We have been reducing risk for 2yrs, selling gains in equities and moving to cash,” said the CIO. “Cash is very expensive to hold.” Euro cash rates remain -0.40%. “This requires patience, just as in 2005-2006. But that was the right decision and we did very well.” Picking tops and bottoms is impossible, particularly with such vast pools of capital. “We started buying in 2008 and continued all the way through 2009. This set us up well through this bull market. I recently told my team they can buy again. But they have come back and said, no, no, not yet.”

Denmark: “We match our liabilities with long-term bonds,” said the CIO. “With part of our portfolio we take risk using derivatives and leverage. We translate our private market risks into public market equivalents.” Doing so turns real estate investments into 8-10% annualized volatility risk. Private equity holdings look like public equity holdings from a risk perspective. “We create risk budgets for each asset type and build an advanced risk-parity portfolio using this methodology. We believe that this approach measures risk more honestly.” Indeed, it does.

Denmark II: “We consistently realize lower portfolio volatility than we model,” continued the CIO and his head of public markets. This is because the price of a real estate and private equity portfolio is not marked to market. “US investors over-allocate to private equity and real estate specifically because they have lower reported volatility than risk,” I said, impressed by their honest accounting. The Danes smiled. “Correlations are stochastic,” they said, hinting at the risks of excessive portfolio leverage. “And at this stage in the cycle, they should be expected to shift.”

Scandinavia: What else should I know?” I asked in each meeting. “The Japanese started moving money to Denmark over the past 2-3yrs. They’re indiscriminate buyers, looking for yield and hedging back into Yen.” – “We’re moving money out of US assets because the cost of hedging into Euros costs 3% per year.” – “Regulators just changed the rules to allow Swedish state pensions to increase illiquid portfolios and decrease bond holdings.” – “The greatest risk we see is Italy. It is a far greater risk than Brexit, it is bigger than Lehman,” said everyone I met.

* * *

Anecdote: “We are trying to understand America, Americans,” said the soft-spoken Scandinavians, financial market pillagers. “America has been the world’s moral authority. And okay, so perhaps you have not always lived up to that. But you have tried. And it has been this way for our whole lives.” I nodded. “You have stood as the protector of global trade. Free trade. Democracy. And what is right versus wrong. America has defended the weak.”

One of the many wonderful rewards of travel is to see yourself reflected in foreign eyes. Throughout today’s Scandinavia, America’s reflection looks the same. “It has been this way for many, many of your Presidents. And now it seems that this has all changed.”

Scandinavians are trying to make sense of the changes happening in America. They’re not alone. Americans are trying too. I explained that we had reached a tipping point, driven by income and wealth inequality, amplified by income insecurity, in a technologically-disrupted world transforming faster than at any time in human history. And instead of voting for more of the same, we voted for change. Real change. A redistribution of economic spoils between capital and labor. A redefinition of our relationship with foreigners; neighbors, friends, enemies.

And in the pursuit of these things, we’re attacking orthodox thinking on every front. NATO, trade, immigration, climate change, free speech, economic stimulus, deficit spending, central bank independence. We have also decided to slow China’s ascent. And while no one knows where this will lead, surely it will change the trajectory of the trends that dominated recent decades.

“Well, we see that America has now begun to use its economic and military might to take what it wants. And this returns the world to something we have not seen for a very, very long time – where might makes right. To the law of the jungle.”

via RSS https://ift.tt/2Rp1zHg Tyler Durden

After the best week for the S&P 500 since 2011, US equity futures are opening up notably (Dow +400) after the so-called ‘trade-truce’. WTI is also soaring but yuan is fading off pre-open highs…

Including Friday’s meltup FOMO, stocks are up 2.5-3%…

Notably, yuan is fading as futures open…

In line with one “base case” which correctly predicted that a Truce – in which existing tariffs stay in place – is the most likely outcome (with a 70% chance), while also accurately predicting a 3 month ceasefire, the agreement will be enough to get the S&P to 2,800…

… so look for a burst of buying in the S&P over the next 24 hours which pushes the stock index higher, but not much higher as trader concerns will next revert back to the Fed which now that trade tensions have been temporarily removed, may promptly revert back to its hawkish bias and resume rising rates well into 2019 which in turn will be the next bearish event-risk to put a damper on any substantial Christmas rally.

And that is exactly where S&P Futs are – 2800…

Meanwhile, WTI Crude futures are soaring 2.5% despite Putin’s confirmation that there will be no new oil production cuts…

Gold spiked but immediately faded back.

via RSS https://ift.tt/2RshCUH Tyler Durden

Authored by Mike Shedlock via MishTalk,

Fresh on the heels of UC Berkeley saying they cannot trust kids to grade teachers, comes an even sillier Columbia idea.

According to a Columbia University PowerPoint presentation Trusting Students to Assess Themselves, inclusive grading starts by “trusting students to assess themselves.”

I picked that link up from Columbia University Seminar to Promote ‘Inclusive Grading’.

Rationale for Self-Grading

Teachers don’t know how to grade or don’t want to take the time.

Honor Code

Not to worry. Columbia university will ask students to sign a pledge card so they won’t cheat. That’s sure to fix everything.​

86% of Students Like It

“It was nice to know your grade right away and not torture yourself over a bad exam for a whole weekend.”

Start by Trusting Students

Yes, Let’s Trust Student Evaluations Except ….

Two days ago I noted The University of California, Berkeley is very unhappy with how students grade teachers.

Students Say They Prefer White Male Professors: We Cannot Allow That, Can We?

A Berkeley professor wants to nix student evaluations of teachers because students are biased.

“I Know the Students are Biased”

Over the next few weeks, students will get the chance to evaluate their professors and TAs. They’re going to get it wrong. They’ll be harder on women and people of color than on white men. Tenured white male faculty, in particular, should help their students understand this. 1/8

— Brian DeLay (@BrianDeLay) November 25, 2018

There you have it. Let’s not ask students to rank teachers because “I, Brian DeLay, know the students will get it wrong.“

It is the height of arrogance for DeLay to tell students that he knows they are biased and wrong.

Ironically, we are supposed to believe students will display bias when grading teachers but the students will have absolutely no bias when grading themselves.

via RSS https://ift.tt/2FUItaT Tyler Durden

With global stocks suffering a bout of unprecedented volatility in the past two months, and the S&P routed by not one but two corrections in 2018, traders have been understandably shaken – and in many cases stunned – by a market in which nothing seemed to be working for the first 11 months of the year (although now that the US-China trade war has been put on hold for the next three months, we may yet see a burst of year-end euphoria as BTFDers come out in force).

However, not even the most jittery market since the financial crisis, one which saw virtually every major asset class generate barely any positive returns in 2018, and most were sharply lower…

… has managed to sap the sellside analyst crew of its traditional optimism.

According to Bloomberg calculations, of the 14 forecasts for 2019 from firms it tracks, the average prediction as of Nov 30 is for the S&P 500 to rise 11% to 3,056 by the end of next year. And while the steepness of the forecast path partly reflects the damage done to stocks since September, it’s the most optimistic call since the bull market began in 2009, according to Bloomberg’s Lu Wang.

This chronic sellside resilience contrasts with sullen investor mood, where as reported previously individuals are raising cash at the fastest pace since the financial crisiswhile hedge funds are rotation out of growth names and turning all-out “defensive.”

Countering the growing investor paranoia which has had the market rug pulled from under its feet on every occasion a consensus emerged to buy the dip, Wall Street analysts claim that despite the rout over the past two months, there is little evidence that a market crash is looming. Indeed, while overall economy growth is decelerating – in some cases sharply – corporate profits are still expanding. As a result, while the threat of a trade war and higher interest rates is real, the fear has probably gone too far, as reflected in a steep decline in valuations, according to Credit Suisse’s Jonathan Golub, who has the most optimistic target at 3,350.

Well, yes and no.

With the S&P P/E multiple shrinking to about 16.0x forward EPS forecasts, the S&P 500’s multiple is down 15% from a year ago, and while it is near the cheapest level since early 2016, it is still well above its long-term historical average. Also, while in 2018 profits jumped almost 25% – even as stocks are just 3% higher after last week’s furious rally – profit growth is expected to grind to a crawl in 2019 as Trump tax cuts are anniversaried and as the global economic slowdown and the fading of the Trump fiscal stimulus turns into a headwind.

“We have pretty strong valuation support for the market. I think investors are too bearish,” Palisade Capital Management CIO Dan Veru told Bloomberg; his view is one of the more extremely bullish heading into the new year: “They are taking these near-term headwinds, drawing a straight line, and given how long this expansion has been in place, saying this has to be the beginning of the end. My view is, we’re in the fifth inning of a nine-inning ball game.”

Not everyone agrees: Mike Wilson at Morgan Stanley has the least bullish forecast for 2019, and expected the market to be unchanged this year, with a year-end target at 2,750. Echoing what we noted above, Wilson expects the pace of profit expansions to slow to just 4.3 percent, an 80% drop from the 25% growth seen this year; he also sees the odds for a technical recession rising as global demand weakens. In fact, Wilson did not mince his words, and two weeks ago said that the S&P is now officially in a bear market, as buying the dip no longer works.

Elsewhere, Bank of America’s Savita Subramanian no longer sees the S&P rising next year. As we reported two weeks ago, the BofA strategist expects upside to equities through year-end and into next year and thus maintains her 2018 year-end target outlook for 3000 on the S&P 500 as a result of “still-supportive fundamentals, still-tepid equity sentiment and more reasonable valuations keep us positive.”

But in 2019, BofA now sees elevated likelihood of a peak in the S&P 500; not helping is BofA’s rates team calling for an inverted yield curve during the year (same as Goldman which expects the yield curve to invert in the second half), and with homebuilders peaking about one year ago and typically leading equities by about two years, the bank’s credit team is forecasting rising spreads in 2019.

“We suspect that we see a peak in equities next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside, keeping us constructive for now,” Subramanian told clients in mid-November. As a result, Subramanian is urging investors to buy utility stocks as a hedge against market declines. She expects the S&P 500 to linger around 3,000 before retreating to end the next year at 2,900, down 100 points from its 2018 closing level.

BofA’s chief investment strategist, Michael Hartnett, is even more pessimistic expecting “big lows” in the market over the next few months as “the era of excess returns in bonds and equities has ended“…

… while the continued shrinkage in global central bank balance sheets will only add to the rising headwinds.

Meanwhile, in the aftermath of the biggest selloff in years, a sense of caution is creeping up even among the optimists. As Bloomberg notes, even the biggest bull is turning a bit defensive: Jonathan Golub at Credit Suisse this week downgraded cyclical stocks such as banks, industrials and materials producers while raising recommendations for companies seen offering stable income and dividends, like health-care and consumer staples. He expects the S&P to rise almost 600 points by December 31, 2019 from its Friday close, hitting 3,350.

What is more surprising, is that despite his headline optimism, reading between the lines of Credit Suisse forecasts one would be left with the impression that a recession is imminent: the bank shows that the market historically stops gaining about 6 months ahead of a recession…

… while on virtually all occasions since 1968, a bear market has been associated with a recession.

Still, with the exception of Morgan Stanley, all strategists remain optimistic and expect stocks to go up next year from where they are now. Yet underneath the buoyancy, a gap is widening. At 22 percent, the spread between the highest and lowest forecast is the widest since 2012.

Of course, anyone listening to the “strategist siren song” should be aware of their perpetual propensity to enter the new year bullish: after all clients will trade more if they are optimistic, not if they anticipate a crash. Since Bloomberg began tracking sellside reco data in 1999, professional forecasters have never once predicted a down year, with the average annual gain coming in at 9%.

But before we even get to 2019, there are still four weeks left for 2018; the average sellside forecast is for the S&P to hit 2,942. And even after the best week since 2011, the S&P 500 would need to jump roughly 7% to get there, although this weekend’s trade truce between the US and China may facilitate the release of animal spirits. Still, a 7% rally in the last month has only happened four times in the last 90 years.

Finally, for those who invest based on Wall Street recommendations, keep in mind that over the past two decades, chronically optimistic strategists’ track record is anything but perfect. While their bullishness looks prescient when shares are rising – as they have been for the past decade thanks to $15 trillion in central bank liquidity – the S&P 500 has exceeded strategists’ target by 4.4% points a year during this bull market.

That in mind, any investors who had listened to bullish sellside recommendations during the last two bear markets would have lost half of their investments. And with central bank liquidity now going into reverse, investors may

via RSS https://ift.tt/2FSi1Pa Tyler Durden

Much has been said about the threat that some $3 trillion in BBB-rated bonds (out of a total investment grade universe of $6.4 trillion) present to the credit market, with growing fears that the next economic slowdown will see over $1 trillion in “fallen angel” credit swamp the junk bond market, sending yields and spreads sprinting higher. Less has been said about the risk of higher-rated A and AA bonds being downgraded to BBB on their way to junk (although we touched on this threat too last Friday in “A Record $90 Billion A-Rated Bonds Downgraded To BBB In Q4“).

But while the risk of a wholesale downgrade of the investment grade market is increasingly being priced in by the market – even if the timing remains suspect and might even be postponed if the Fed were to cut rates in 2019 as JPM observed overnight when noting the inversion in the front-end (2Y-1Y forwards spreads) of the US curve, a new big concern for the credit market is emerging, and here the timing of the imminent threat is all too urgent.

Because while some may be tempted to ignore the BBB downgrade “wall of worry”, corporate America is now facing a “maturity tsunami of worry” that is some 1.6 trillion dollars high.

As the following chart from BNP Paribas shows, a wall of maturing debt is about to slam head on into S&P 500 companies. Commenting on the chart, BNP understandable writes that it is “concerned by the maturity wall of bonds that need to be refinance over the next few years.” And, as Bloomberg’s Sebastian Boyd observes, said maturity wall is made even scarier by adding the amount available in untapped revolvers, which is money that in theory doesn’t need to be paid back and splits the counterparty risk with the company’s bank lenders (see GE).

More than a wall, the debt coming due is a wave that has been building for a decade. Or, as we called it above, a tsunami, which will hit both viable and “zombie” companies with billions in higher interest expense costs once the wave finally breaks, some time in 2019.

That said, nothing shown in the chart above should come as a surprise as the amount of newly issued debt (and also debt coming due) has been growing at an exponential rate over the past decade. Indeed, a historical chart looks truly impressive – or terrifying – considering that the amount of investment-grade bonds coming due in 1-3 years in June 2007 was only $360 million. Back then the spread on the overall index was in the mid-90s, roughly where it was in the first months of this year. However, as Boyd notes, the market cap of the Bloomberg Barclays 1-3 Year Credit index reached a record high of $1.4 trillion at the end of September, or roughly three times what it was before the crisis.

Finally, just as troubling is this chart from SRP which in addition to IG, also incorporates the amount of junk bond maturities in the coming decade.

Needless to say, as trillions in debt mature over the next several years and have to be rolled over into debt with far higher yields and cash coupons, corporations will be saddled with tens of billions in additional annual interest expense costs, money which CEOs and CFOs would have otherwise used to fund stock buybacks.

As for the other key question – whether this $1.6 trillion “debt maturity tsunami” results in a cascade of defaults – that will be answered by Fed Chair Powell: unless the Fed takes aggressive action to cut rates (and keep zombie companies alive), between the “falling angles” and the rotting “zombie companies” that are about to die for the last time, the next two years of mass defaults should prove to be quite exciting for those who still have dry powder to go angel and/or zombie hunting…

via RSS https://ift.tt/2RroUIk Tyler Durden