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Back in November of 2017, this website was the first to suggest that a flood of “fallen angels”, or the lowest, BBB-rated investment grade bonds that are downgraded to junk, will be the event that triggers the next corporate debt crisis. In “Hunting Angels: What The World’s Most Bearish Hedge Fund Will Short Next“, we quoted from the IMF’s Oct 2017 “Global Financial Stability Report”  which issued an ominous warning:

… BBB bonds now make up nearly 50% of the index of investment grade bonds, an all time high. BBB bonds are only one notch above high yield, and are at the greatest risk of becoming fallen angels, that is bonds that were investment grade when issued, but subsequently get downgraded to below investment grade, or what is known these days as high yield. It then points out that investors have never been more at risk of capital loss if yields were to rise. In addition, it notes volatility targeting investors will mechanically increase leverage as volatility drops, with variable annuities investors having little flexibility to deviate from target volatility

Following this article, the topic of a tsunami in “fallen angel” credits took on greater urgency, because with over $3 trillion in bonds on the cusp of downgrade, as we discussed in “The $6.4 Trillion Question: How Many BBB Bonds Are About To Be Downgraded“, countless asset managers warned (here, here and here) that this was the biggest threat to the credit pillar of both the US economy and stock market (recall the bulk of BBB rated issuance was used to fund the trillions in buybacks that levitated the stock market over the past few years).

However, despite a few close scares, and the downgrades of some massive IG names to junk such as Ford and more recently, Macy’s, there never emerged a clear catalyst that would trigger a wholesale downgrade of IG names to junk, especially since the Fed ending its monetary tightening in late 2018 and unleashed another rate cut cycle coupled with QE4 in 2019 sent IG and HY yields and spreads to record lows, even though as Morgan Stanley pointed out no less than 55% of BBB-rated investment grade bonds, would have a junk rating based on leverage alone.

But the bandwagon of fallen angel optimism that prompted the mockery of anyone who warned about the risk of a fallen angel tsunami resulting a corporate bond crash, came to screeching halt on Monday when Saudi Arabia started an all-out price war with Russia and US shale producers, destroying the OPEC cartel overnight and causing the biggest one-day drop in oil prices in almost 30 years.

As Bloomberg Intelligence analyst Spencer Cutter writes, following Monday’s plunge in oil prices, more than $140 billion of bonds issued by North American energy companies are at risk of losing their investment grade status, noting that a number of bonds from high grade rated oil producers already trade with credit spreads approaching distressed levels. Worse, according to Cutter, “a prolonged downturn could affect an additional $320 billion of triple-B rated midstream debt.“

Here is what we know: as of this moment, over $140 billion of debt issued by independent oil and gas producers, oilfield services providers and integrated energy companies has triple-B credit ratings from Moody’s or S&P and is now at risk of falling to junk status.

In the 2015-16 downturn, both credit-rating companies lowered their commodity-price expectations, driving a wave of rating cuts. Occidental Petroleum, which yesterday slashed its dividend for the first time in almost two decades to preserve cash flow, is the largest issuer, with almost $35 billion of debt and credit ratings of Baa3/BBB. As further shown in the table below, other significant potential fallen angels include Canadian Natural Resources (Baa2/BBB+), Noble Energy (Baa3/BBB), Apache Corp. (Baa3/BBB) and Concho Resources (Baa3/BBB-). A number of companies already have one foot in the high yield camp including Devon Energy (Ba1/BBB-), Hess (Ba1/BBB-) and Continental Resources (Ba1/BBB-).

And while in the past rating agencies have been painfully behind the curve and slow to adjust to changing fundamentals (for obvious conflicted reasons – after all the last thing their clients want us to see their bonds crater following a downgrade to junk), this time they have no choice as the market has already repriced the relevant debt.

As Bloomberg notes, since the recent plunge in oil prices, bonds issued by several oil and natural gas producers with triple-B credit ratings have already started to trade with high yield-like credit spreads. In the case of Ovintiv and Continental Resources, which have crossover ratings of Ba1 at Moody’s and triple-B from S&P and Fitch, spreads on their unsecured bonds have climbed to about 800 bps, close to the 1,000 bp-plus level, which typically qualifies as distressed. Spreads on Occidental Petroleum notes due in 2029 have climbed north of 700 bps, while Devon Energy and Noble Energy benchmark bond spreads have jumped to 630 bps and 540 bps, respectively. In January, none of the bonds had a credit spread above 300 bps.

Putting those spread in context, the FT noted that almost 12% of the $936BN of bonds issued by US oil and gas companies are were trading on Monday with a yield more than 10% points above Treasuries — a commonly used definition of distress. Among junk-rated borrowers, issuers with ratings below triple-B, which account for $175bn of the total, the proportion of debt in distressed territory has risen to almost two-thirds.

Ok, some may counter, $140BN is a lot but there is just over $3 trillion in total BBB rated credits. This is hardly a disaster.

The problem is that the threat of imminent downgrade to junk is not only in the E&P space: one it strikes, it will certainly affect the midstream as well.

To be sure, while midstream companies aren’t as directly exposed to swings in commodity prices, a prolonged downturn will result in sustained lower throughput volume and an effort to restructure gathering, processing and transportation contracts by their oil and natural gas producing customers. A wholesale review of credit ratings across the sector could affect $320 billion of bonds that have triple-B ratings from Moody’s or S&P, according to Bloomberg. At Baa3 and BBB- rated, Energy Transfer and Sabine Pass Liquefaction each have the lowest level of investment grade rating. While rated high grade by S&P and Fitch, Plains All American already carries junk ratings from Moody’s. Other producers at risk include Williams (Baa3/BBB), Kinder Morgan (Baa2/BBB) and MPLX (Baa2/BBB).

In other words, between just the oil producers and the midstream cos, some $360BN is at risk of near-term downgrade to junk. Assuming that’s all there is, it would increase the size of the $1.2 trillion junk bond market by nearly 30%, resulting in an unprecedented selloff in an asset class that has become an anchor to yield-starved speculators who will be forced to liquidate most if not all of their credit exposure, which would then also drag down the rest of the IG space, resulting in a catastrophic crash in the credit market.

All of this, of course, assumes that the rest of the $3 trillion in Investment Grade names are not downgraded. However with the coronavirus pandemic now assuring not only a bear market, but a recession, guaranteeing that the bulk of the IG names are hit by at least a one notch downgrade, the only question is whether all those names, which MS calculated at roughly $1.6 trillion, that already have junk bond fundamentals, will be downgraded. Alas, even if it is a modest portion, it would still be enough to create a cascade that shuts down the US credit market first, and then spills over to every capital market in the world.

The US House of Representatives is expected to announce an economic relief package for Americans hurt by the impact of the Covid-19 outbreak. The announcement could be seen as soon as Wednesday afternoon, with a floor vote on Thursday. 

Democrats are expected to include “insurance, paid sick leave, and family and medical leave in the bill,” reported Reuters.

House Majority Leader Steny Hoyer, Maryland Democrat, said President Trump’s tax cut proposal is a “non-starter” and would be excluded in the legislation.

Treasury Secretary Steven Mnuchin hopes to reach an initial agreement with congress on the economic relief package in the next 48 hours.

With the stock market crashing this week, President Trump promised on Monday a ‘very very substantial’ relief to hard-working Americans hit hard by the virus. President Trump has been in talks with House Speaker Nancy Pelosi on possible assistance programs to cushion the economic shock. 

Regarding President Trump’s proposal, he told GOP Senators earlier this week that he wants to waive payroll taxes through the election. Senator Marco Rubio, Florida Republican, said that the payroll cuts could be around $300 billion.

The pitch of economic relief, if it is from Democrats or President Trump, comes as virus cases and deaths are surging across the country.

National Institute of Allergy and Infectious Diseases Director Anthony Fauci was quoted on Wednesday as saying Covid-19 is 10x more lethal than the seasonal flu. 

Some form of economic relief is likely to be seen this week, could help Americans weather the next economic downturn.

After another trouncing on Super Tuesday 2, it would seem Americans are really not fans of socialism after all…

Bernie Sanders odds of becoming the Democratic Party’s nominee for President have collapsed below those of Hillary Clinton!!

Source: Bloomberg

That certainly de-escalated quickly.

Jonathan Turley noted the significance of March 10th as the likely critical blow to Bernie Sanders in his campaign for the presidency. That was the day – 100 year ago – that Eugene Debs, the last major socialist presidential candidate, lost his bid for freedom. He would run his final presidential campaign from jail.

Sanders seems to have fallen to the Eugene Debs curse not just in terms of the calendar but the response of the establishment. Liberal icons like Louis Brandeis would join in condemning him to prison and his presidential campaigns were harassed by a wide array of political and police forces. For Sanders, the only thing that has changed is the threat of criminal prosecution. The united front against his campaign remained the same.

The Dow is down over 1200 points, extending losses after Treasury Sec Mnuchin said that “there are no plans for markets intervention.”

Erasing all of yesterday’s hope-filled gains…

For now yields are relatively well behaved but the dollar is spiking as stocks are slammed.

Disgraced movie mogul Harvey Weinstein was sentenced to 23 years in prison on Wednesday for sexually assaulting two women.

The sentence follows a landmark verdict on February 24, after a jury found that Weinstein raped aspiring actress Jessica Mann at a DoubleTree hotel in 2013 when she was 27-years-old, and forced oral sex on former production assistant Mimi Haleyi, now 42, at his apartment in 2006.

Weinstein’s sentencing was watched in the Manhattan courtroom by all the women who had testified at trial against the once-feared mogul, who was convicted Feb. 24 of rape and committing a criminal sexual act more than two years after explosive news articles about his alleged serial sexual abuse of women.

The producer of films including “Pulp Fiction,” “Shakespeare in Love,” and “Gangs of New York” was found not guilty of the most serious charges: two counts of predatory sexual assault for which he could have been sentenced to life in prison. He also was acquitted of first-degree rape. –CNBC

Weinstein faced a minimum of five years in prison. His lawyer was ‘overcome with anger’ at the sentence.

WATCH LIVE: Harvey Weinstein’s defense team speak following his 23 year sentence.

“That number did not speak to justice. That number is a cowardly number. The judge caved, the jury caved.” https://t.co/2CVVpC3UgP pic.twitter.com/GlpY61xzTl

— CBS News (@CBSNews) March 11, 2020

Prior to his sentence, Weinstein told the judge “I am totally confused,” adding “I think men are confused about all of this…this feeling of thousands of men and women who are losing due process, I’m worried about this country.”

“This is not the right atmosphere in the United States of America,” he added.

Weinstein said he had “serious friendships” with the two primary accusers in the case, Miriam Haley and Jessica Mann. Both women delivered “victim impact” statements before Burke issued the sentence. Haley, who says she was sexually assaulted by Weinstein in his apartment in 2006, told the judge that she was left emotionally damaged by the incident. –Variety

“It scarred me deeply, mentally and emotionally,” said Haley. “What he did not only stripped me of my dignity as a human being and a woman, but it crushed my confidence.”

Despite the constant imploring from administration officials that all is well…

“We see no material impact on our economy,” Larry Kudlow, director of the National Economic Council Director, told Fox Business Network.

Almost 75% of companies have reported supply chain disruptions as a result of coronavirus disease, or COVID-19, according to a new survey released by the Institute for Supply Management (ISM). 

Additionally, the first-round results of the survey focused on the effects of COVID-19 on business and supply chains, show that more than 80% of companies expect to experience some impact because of COVID-19 disruptions.

“The story the data tells is that companies are faced with a lengthy recovery to normal operations in the wake of the virus outbreak,” said Thomas Derry, CEO of ISM.

“For a majority of U.S. businesses, lead times have doubled, and that shortage is compounded by the shortage of air and ocean freight options to move product to the United States — even if they can get orders filled.”

Primary reported supply chain impacts include the following:

• 57 percent noted longer lead times for tier-1 China-sourced components, with average lead times more than doubling compared to the end of 2019.

• Manufacturers in China report operating at 50 percent capacity with 56 percent of normal staff.

• More than 44 percent of respondents do not have a plan in place to address supply disruption from China. Of those, a majority (23 percent of respondents) report current disruptions.

• Of the companies expecting supply chain impacts, the severity anticipated increases after the first quarter of 2020.

• Six in 10 (62%) respondents are experiencing delays in receiving orders from China.

• More than half (53%) are having difficulty getting supply chain information from China.

• Nearly one-half are experiencing delays moving goods within China (48%).

• Almost one-half (46%) report delays loading goods at Chinese ports.

Conducted between February 22 and March 5, the survey’s 628 respondents largely represent U.S. manufacturing (52%) and non-manufacturing (48%) organizations, 81 percent of which have revenues of less than US$10 billion. Respondent roles range from emerging practitioner (4%), to chief procurement officer (6%), with 73 percent being experienced practitioners, managers and directors in a supply chain management role.

“We’re seeing that organizations who diversified their supplier base after experiencing tariff impacts, are potentially more equipped to address the effects of COVID-19 on their supply chains,” said Derry.

More than 60 percent of companies that ordinarily travel to China have no plans to do so over the next six months. Additionally, nearly one-half (47%) note travel to other international areas is subject to extra scrutiny or limitations, with the most mentioned areas being Korea, Italy, Japan, broadly Europe, Hong Kong and Singapore.

Authored by Tom Luongo via Gold, Goats, ‘n Guns,

Back in August I penned a post called, “The Battle of the ‘Flations Has Begun.”

With an historic 2000 point drop in the Dow Jones Industrials on Monday in response to Saudi Arabia and Russia declaring an oil price war on, well, everyone it’s clear that one of the two ‘flations, deflation, has won out.

In retrospect the timing out that post was pretty good, because just a few weeks later the repo markets seized up, SOFR zoomed to an all-time high of more than 10% and the Fed was awoken from its slumber to begin intervening to keep markets from collapsing.

It initiated a reflation trade based on the hope that the Fed just being there was all that was needed to restore confidence in global markets.

In that post I made the point that the choice between inflation and deflation is a non-choice. They are two sides of the same coin. The question is only who benefits from which side.

Those in power always choose inflation because, in their minds, it is less upsetting to the social order than deflation.

And their power rests on maintaining the current social order.

Deflation benefits savers and, frankly, normal people who don’t have access to new money at the lowest available prices, those set by the Fed’s discount window.

It gives them back power stolen from them through inflation.

The media helps this narrative limp along bamboozling all of us with poorly-conceived first order analysis of why we want inflation while refusing to admit they are a recipients of this government/central bank largess through advertising fees paid with a portion of this fake capital.

They inflate to maintain their power and their illusion of control over the forces of economic law.

But more importantly, they inflate because they can.

And worse than that, they do so by conjuring this new money out of thin air by selling debt against our labor.

It is, frankly, beyond criminal.

Those on the left endlessly crying about evil corporations miss the point that it is government itself which creates this dynamic, spending far beyond its means. Wresting control of the government and sticking it to the man, as the Bernie Bros want to do, isn’t the solution.

It’s just becoming part of the problem.

They miss the fundamental dynamic of debt-based money. It’s a tax against your future labor. We are all debt serfs in a world where the money in your pocket is a liability owed to someone else.

That’s not community. That’s usury. And the great game of our global financial system is that those who are closest to power borrow at the best rates, sell that money to us at a markup while the government spends it without limit.

This crowds us out of the market for goods and services, further driving up costs to the productive portion of the economy, us. In effect it’s a form of double taxation that’s applied before they then collect taxes at every stage of production.

And in the off chance we actually turn a profit on any of this, they punitively tax that income as well.

But, hey, didn’t you know, you can now borrow for a new mortgage at the lowest rates in history. You can buy a new car, a depreciating asset, for longer term than the life of the car.

You can have it all and have it now. Debt is patriotic. It boosts GDP!

Saving is bad. It causes recessions. I know this because some very smart misread John Maynard Keynes, c.f. The Paradox of Thrift.

In short this system is designed to give to government and its consiglieres the outrageous advantage of spending tomorrow’s money at yesterday’s prices for today’s goods.

And punishing us in every way for daring to save even a penny of our meager earnings. So hostile have they become to savers that they have instituted negative interest rates to further push up the velocity of money hoping to whip up some of that old time inflation to keep the value of their assets from falling.

In a real economy, savings forms the basis for the pool of investible capital. That savings is deployed at a market rate of interest based on the risks associated with that investment.

Mucking with interest rates distorts the use of available capital. It is capital destructive in the end, as eventually the amount of debt issued supporting the economic activity is greater than the profit generated by that activity.

That creates the bust and in the words of the late Neil Peart, “all those wasted years.“

Because it is time that is stolen from us with this terrible system. And our time is the only truly scarce resource in the world since none of us get out of here alive.

Ultimately this inflation game is a Ponzi scheme. The amount of money going to pay off the debt eventually becomes greater than the next round of debt you can sell to the greater fool.

And no amount of money printing can fill the void when the entire edifice begins to collapse.

That’s what’s happening today. There is no fixing the plumbing of the global financial system at the repo window. Nor can lower interest rates help stimulate demand no matter what President Trump thinks.

So he can berate the Fed all he likes, rates want to go higher because the demand for dollars is acute and the market is willing to pay a far higher rate than 1.0% to get them.

All that can happen now is assets deflate and into that vortex of deflation they’ll pour endless amounts of new money in the vain hope of filling up the void.

What happened this week occurs when one who has saved, Russia, decided that it no longer wanted to subsidize those who have borrowed to the hilt. When Russia said, “No!” on Friday to cutting production to support asset prices based on $60 per barrel oil, they were saying that’s enough.

I like to think of global trade in real goods as the M0, or base money, of the global financial system and the oil trade that which is the M0 of that.

All of the credit, government debt, corporate debt, stocks prices and the rest are simply credit derivatives in a fractional reserve banking system of that fundamental trade in goods and services.

And the value of the monetary base for global trade was just halved in the last six weeks with the price of oil crashing from $70 per barrel (Brent) to around $35.

We all know what happens with the Fed raises rates and contracts its balance sheet. We get deflation.

So why should we be surprised that Russia prompted a reset of all valuations when they are the ones whose political power is degraded by a world leveraged up on an oil price that is too high?

The outrageous benefit of this debt-based Ponzi scheme run by the West has morphed into a the ultimate punishment tool for those who stand against it.

This move will force trillions in debt to be liquidated. Prices will adjust down. Debtor economies which are in desperate need of U.S. dollars, just had their energy costs cut in half, making it far easier for real people to get to work, buy food, pay off debt and build a life for themselves.

Those who have saved in real assets, like gold, just saw their wealth double in real terms over the past few days.

All Russia had to do was look Saudi Prince Mohammed bin Salman in the eye and say no. Bin Salman took the bait and cut off what’s left of his kingdom to spite Putin’s face.

Both countries feel comfortable for now with $30 per barrel oil. All the debt the U.S. has issued to enslave the world supporting your assets at higher prices now have to be repriced.

Russia, as a net saver, chose deflation as the way forward. As I said on Friday, this is the moment they have been preparing for for years.

The number of dollars you have is irrelevant. It is only what you can buy with that money that gives that money power.

Deflation is the transfer of wealth back from debtors to savers through the increase in purchasing power of your money and the liquidation of over-priced assets by desperate debtors trying to remain solvent.

The cries and howls you hear today are from debtors. Savers smiled. Gold held its water. Russia’s balance sheet held firm thanks to years of buying it on sale and storing it away for the right moment.

This is why Russia is saying they can weather $25 per barrel oil longer than anyone else. Because they can.

Will it be easy? No. Do they want to? No. Will they if they have to? Yes.

And if the West does what it is likely to do, print to inflate away the debt coupled with massive stimulus spending, which is what I’m expecting from both Christine Lagarde at the ECB and Donald Trump in the U.S. then Russia’s clean balance sheet and its prodigious gold reserves will insulate them from the chaos while asset prices deflate.

And that’s the lesson to all of us. It’s time for savers to stand up for themselves. It’s time for a little pain to be felt by those who have inflicted it without end for so long. Deflation is hard but at this point it is hardest on those who have lent the most.

They are the ones screaming for relief today. They are the ones bellying up to the repo window in record numbers. And they will be the ones who will have to sue for peace in the end.

I keep reminding you that when you owe the bank a thousand dollars it’s your problem. When you owe the bank a few billion, it’s the bank’s problem.

And today the banks’ problems are multiplying like mushrooms in cow shit after a good rain.

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