An Establishment In Panic

Submitted by Patrick Buchanan via Buchanan.org,

Donald Trump “appeals to racism.”

 

“[F]rom the beginning … his campaign has profited from voter prejudice and hatred” and represents an “authoritarian assault upon democracy.”

 

If Speaker Paul Ryan wishes to be “on the right side of history … he must condemn Mr. Trump clearly and comprehensively. The same goes for every other Republican leader.”

 

“Maybe that would split the (Republican) party,” but, “No job is worth the moral stain that would come from embracing (Trump). No party is worth saving at the expense of the country.”

 

If Republican leaders wish to be regarded as moral, every one of them must renounce Trump, even if it means destroying their party.

Who has laid down this moral mandate? The Holy Father in Rome?

No. The voice posturing as the conscience of America is the Washington Post, which champions abortion on demand and has not, in the memory of this writer, endorsed any Republican for president – though it did endorse Marion Barry three times for mayor of D.C.

Anticipating the Post’s orders, Sen. Marco Rubio has been painting Trump as a “scam artist” and “con artist,” with an “orange” complexion, a “spray tan” and “tiny hands,” who is “unfit to lead the party of Lincoln and Reagan.”

The establishment is loving Rubio, and the networks are giving him more airtime. And Rubio is reciprocating, promising that, even if defeated in his home state of Florida on March 15, he will drive his pickup across the country warning against the menace of Trump.

Rubio, however, seems not to have detected the moral threat of Trump, until polls showed Rubio being wiped out on Super Tuesday and in real danger of losing Florida.

Mitt Romney has also suddenly discovered what a fraud and phony is the businessman-builder whose endorsement he so avidly sought and so oleaginously accepted in Las Vegas in 2012.

Before other Republicans submit to the ultimatum of the Post, and of the columnists and commentators pushing a “Never Trump” strategy at the Cleveland convention, they should ask themselves: For whom is it that they will be bringing about party suicide?

That the Beltway elites, whose voice is the Post, hate and fear Trump is not only undeniable, it is understandable.

The Post beat the drums for the endless Mideast wars that bled and near bankrupted the country. Trump will not start another.

The Post welcomes open borders that bring in millions to continue the endless expansion of the welfare state and to change the character of the country we grew up in. Trump will build the wall and repatriate those here illegally.

Trump threatens the trade treaties that enable amoral transnational corporations to ship factories and jobs overseas to produce cheaply abroad and be rid of American employees who are ever demanding better wages and working conditions.

What does the Post care about trade deals that deindustrialize America when the advertising dollars of the big conglomerates are what make Big Media fat and happy?

The political establishment in Washington depends on Wall Street and K Street for PAC money and campaign contributions. Wall Street and K Street depend on the political establishment to protect their right to abandon America for the greener pastures abroad.

Before March 15, when Florida and Ohio vote and the fates of Rubio and Gov. John Kasich are decided, nothing is likely to stop the ferocious infighting of the primaries.

But after March 15, the smoke will have cleared.

If Trump has fallen short of a glide path to the nomination, the war goes on. But if Trump seems to be the near-certain nominee, it will be a time for acceptance, a time for a cease-fire in this bloodiest of civil wars in the GOP.

Otherwise, the party will kick away any chance of keeping Hillary Clinton out of the White House, and perhaps kick away its future as well.

While the depth and rancor of the divisions in the party are apparent, so also is the opportunity. For the turnout in the Republican primaries and caucuses has not only exceeded expectations, it has astonished and awed political observers.

A new “New Majority” has been marching to the polls and voting Republican, a majority unlike any seen since the 49-state landslides of the Nixon and Reagan eras.

If this energy can be maintained, if those throngs of Republican voters can be united in the fall, then the party can hold Congress, capture the While House and reconstitute the Supreme Court.

Come the ides of March, the GOP is going to be in need of its uniters and its statesmen. But today, all Republicans should ask themselves:

Are these folks coming out in droves to vote Republican really the bigoted, hateful and authoritarian people of the Post’s depiction?

 

Or is this not the same old Post that has poured bile on conservatives for generations now in a panic that America’s destiny may be torn away from it and restored to its rightful owners?


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Liberty Links 3/4/16

Below are links to some of the more interesting and important reads I came across today, but will not be publishing on in detail.

Hillary Clinton Turned $1,000 Into $99,540, White House Says (1994 article…some things never change, New York Times)

The Growing Risk of Civil War in Turkey (This country is a total basket case, Washington Post)

Donald Trump’s Policies Are Not Anathema to U.S. Mainstream but an Uncomfortable Reflection of It (Glenn Greenwald, The Intercept)

Susan Sarandon Says Bernie Sanders’ Hollywood Backers Are “Afraid” to Be More Vocal (Total cowards, Hollywood Reporter)

If It Comes Down to Trump or Clinton, Is It Unpatriotic to Abstain? Ralph Nader Has a Better Idea (Huffington Post)

See More Links »

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Gallup: “The Amount Of Debt Americans Carry Is Staggering And Grows Every Day”

And the revelations just keep on coming.

One day after the St. Louis Fed spent thousands in taxpayer funds to “discover” that, gasp, “consumers across the country are borrowing more to buy cars and go to school“, yes really…

… today it’s Gallup’s turn to point out what has been abundantly clear to all non-economist types, and is the reason why the so-called recovery remains nothing but a myth, namely that “Americans Are Buried Under a Mountain of Debt.”

More from John Gleming:

  • Americans who don’t have enough to live comfortably carry higher credit card balances
  • Those who enjoy spending money more than saving money carry more credit card debt
  • Student loan debt associated with highest level of indebtedness

The amount of debt Americans carry is staggering and grows every day.

A prior article explored the kinds and amounts of consumer debt that Americans carry, other than mortgages. Gallup found that only a subset of Americans carries the bulk of consumer debt. This article examines how consumer debt affects different groups of Americans, especially millennials.

Those Without Enough to Live Comfortably Are Using Credit Cards to Supplement Their Resources

Two-thirds of Americans say they have enough money to live comfortably, with more traditionalists (76%) and baby boomers (67%) saying they do than millennials (62%) and Gen Xers (61%).

1_Resources

Those who say they don’t have enough money to live comfortably appear to be using their credit cards to supplement their available resources with high-interest credit. It seems that though their total consumer debt balances are 17% lower than those of Americans who say that they do have enough money to live comfortably, across all generations except traditionalists, Americans who say that they don’t have enough money to live comfortably carry 36% larger credit card balances than those who say that they do have enough money.

The difference is particularly acute among millennials, where those who say that they don’t have enough money to live comfortably carry three times more credit card debt than those who say they do have enough money. Millennials who say they don’t have enough money to live comfortably also carry more auto loan debt and personal loan debt than millennials who say they do have enough money. Millennials are the only generation where those who say that they don’t have enough money to live comfortably carry 8% more total consumer debt than those who say they do have enough money.

Do Americans Enjoy Saving Money or Spending Money More?

Gallup has been tracking whether Americans enjoy saving money or spending money more since 2001. In 2001, 48% of Americans enjoyed spending money more than saving it. The preference for spending money remained at 48% in 2005 and then began a decline, which accelerated during the Great Recession.

At the height of the Great Recession in 2009, just 39% of Americans enjoyed spending money more than saving it. The low point for a preference to spend came in 2014, when just 35% said they enjoyed spending money more than saving it. In 2015, the spending preference crept back up to 37%. In the current research, 39% of Americans said they enjoy spending money more than saving it, while the remaining 61% enjoy saving money more. Neither of these percentages differs appreciably by generation.

2_Save_spend

Those who say they enjoy spending money more tend to earn more but also carry more debt.

Among the generations, those who enjoy spending money more includes a higher proportion of those making $48,000 per year or more than does the group of those who prefer saving money, who include a larger share of those making less than $48,000. The average annual income for spenders is just over $78,500, 9% higher than it is for savers at just over $72,000.

The exception is millennials, where the pattern is reversed. Among millennials, savers have a higher proportion of those making $48,000 per year or more than spenders, who have a larger share of those making less than $48,000. Even with this annual income pattern, however, the average annual income of millennial savers is 5% lower than that of millennial spenders.

3_Annual_income

In general, those who enjoy spending money more carry more credit card debt (81% more), more student loan debt (4% more), more auto loan debt (6% more) and more personal loan debt (37% more) than those who prefer saving it.

Generationally, the only exceptions to this pattern are among Gen Xers and baby boomers. Gen Xers who enjoy spending money more carry less student loan (24% less) and less auto loan debt (11% less) but double the credit card debt (102% more) and significantly more personal loan debt (75% more) than savers. And baby boomers who enjoy spending money more carry significantly less personal debt (23% less) than those who prefer saving it.

Among millennials, those who enjoy spending money more carry more credit card debt (58% more), more student loan debt (23% more), more auto loan debt (26% more) and more personal loan debt (18% more) than millennials who prefer saving.

When Gallup compares the differences in income and total consumer debt between those who enjoy spending money more and those who prefer saving it, Gen Xers, baby boomers and traditionalists who enjoy spending money more carry their income difference in additional consumer debt. In other words, the ratio of the difference in total consumer debt divided by the difference in annual income between these two groups is approximately 1.1-to-1 for members of these generations who enjoy spending money more.

For millennial spenders, however, the ratio is 2.5-to-1. In other words, millennial spenders carry 2.5 times more consumer debt than the difference in their annual income compared with savers.

4_Additional_debt_vs_income

Student Loan Debt Associated With Highest Level of Indebtedness

Almost four in 10 Americans enjoy spending money more than saving it, and they carry a larger debt load across the board though their annual income is higher than those who enjoy saving more. And even among individuals who say that they do not have enough money to live comfortably, almost one-third (32%) still enjoy spending money more than saving it, even if it means piling on more debt, especially credit card debt. This group has among the highest levels of credit card debt — 60% higher than everyone else.

Student loan debt — though not extremely widespread — is associated with the highest levels of indebtedness for all generations, but especially for millennials. And as the data illustrate, those with student loan debt are also more likely to take out a car loan, adding to their already-large debt burden.

For those with student loans, that debt accounts for an average of 36% of the person’s annual income, the largest percentage among all types of consumer debt. On average, total consumer debt accounts for 37% of annual income — but it accounts for 57% of annual income among those with student loans. This is a staggering percentage when considered against all other personal financial demands, such as mortgage or rent, food, telecommunications (including Internet and cable), insurance, savings and investments, and fuel and auto maintenance, among other expenses. Precious little is left over for discretionary spending, and until only recently, discretionary spending in America had been shrinking.

Except for millennials, those who enjoy spending money more than saving match the difference in their annual income (over savers) with the additional consumer debt they carry (over savers). Millennial spenders, though, carry 2.5 times more debt than their income difference over savers.

These data suggest that a significant portion of every generation is buried under a mountain of several different kinds of consumer debt. Though sizable slices of each generation carry no debt, the sheer magnitude of how much Americans with debt do owe is a cause for concern.


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At CPAC, Pro–Criminal Justice Reform and Anti–Death Penalty Activists Make Their Case

The GOP is no longer monolithically the tough-on-crime party many think of it as being. As the debate rages on over whether or not we’re living through a “libertarian moment,” it’s worth noting that conversations around criminal justice reform are featuring prominently this weekend at the Conservative Political Action Conference (CPAC) in National Harbor, Maryland.

Groups like Right on Crime and Conservatives Concerned About the Death Penalty (CCATDP), once viewed mostly as novelties within the movement, are now fixtures of CPAC. What’s more, they’re making the case for rethinking the party line on criminal justice issues in decidedly conservative terms.

“The first year we got a lot of weird looks,” CCATDP’s advocacy coordinator, Marc Hyden, says. “But since we keep coming back, we’re accepted as just another part of the umbrella of conservatism. Nobody questions whether I’m a conservative or not—I’m talking about pro-life policies, fiscal responsibility, and limited government, and the death penalty just doesn’t work with that.”

Right on Crime Deputy Director Derek Cohen also has a playbook for reaching his fellow conservatives—and different messages work for different groups, he says. When talking to fiscal conservatives, he likes to point out that the same government that runs the post office runs the prison system. “Not exactly a model of efficiency,” he says. In Texas, where Right on Crime is based, a move toward giving low-level offenders probation or parole instead of prison time has allowed the state to forgo spending $2 billion on new prison infrastructure.

Social conservatives, on the other hand, “tend to appreciate the human value” and the “redemptive quality” of in-facility programs that help people—including people who have made serious mistakes—better themselves. “Even for serious crimes, even for violent crimes, when we send someone away for a long time, their life is fundamentally altered,” Cohen says. “That could be altered for the better, but that’s only if we’re putting in the rehabilitational elements that reduce recidivism.”

He conjures the example of a father and husband who gets caught with a little bit of heroine. His prison sentence under the old scheme would likely be just long enough to cause him to lose his job and experience problems at home. For social conservatives genuinely nervous about the decline of the family, that’s clearly a sub-optimal outcome. If instead people like that get intensive probation, “they’re at work. They’re at their kids’ ballgames.”

There’s some evidence policy is moving in tandem with the increased support among conservatives. Houston’s district attorney recently introduced guidelines whereby most first-time low-level drug offenders are diverted into community programs instead of locked up, for example.

We’re seeing progress on capital punishment as well. Just yesterday Florida’s legislature passed an overhaul to make it less likely that offenders will end up on death row. On the same day a judge ruled that Alabama’s execution system, like Florida’s before it, is unconstitutional. Last year Nebraska abolished its death penalty, and on Wednesday of this week the Utah state senate voted to do the same. “Now it’s heading over to the [Nebraska state] House,” Hyden says, “and the speaker of the House is against the death penalty! So we may get another red state to repeal the death penalty, which proves that Nebraska wasn’t an anomaly.”

The piecemeal nature of these victories can also be used to appeal to conservatives, he says. “I look at it through a Tenth Amendment framework—change should be done at the state level. If it’s not expressly mentioned in the Constitution, it should be done by the states.”

***

Reason TV caught up with CCATDP’s Hyden at CPAC last year. See what he had to say below.

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Weekend Reading: Is The Bear Market Over Already?

Submitted by Lance Roberts via RealInvestmentAdvice.com,

“The Bear Market Is Dead, Long Live The Bull.” 

You could almost hear the chants from the always bullish biased media this week as the markets ripped higher on “first day of the month” portfolio rebalancing and short-covering by fund managers.

The rally, as discussed this past weekend, was not unexpected:

“The good news is that the market was able to break above 1940, and the 50-dma, which now clears the way for a push to the 1970-1990 where the next levels of resistance will be found.

 

The bad news is that the markets are once again extremely overbought and still confined inside of an overall downtrend.”

(Chart updated through Thursday close)

SP500-MarketUpdate-030416-2

Is this rally, which looks a whole lot like other rallies we have seen repeatedly in recent months, a true return to a bull market? Or is this another trap being set by the bears?

While it is too early to know for sure, with risks still mounted to the downside a little extra caution might not be a bad idea.

This week’s reading list takes a look at various views on the market, economy and what to expect next. What is interesting is that being overly bullish at the moment carries more portfolio risk (loss of capital if you wrong) than being bearish (missing out on early gains).


1) This Is A Suckers Rally by Michael Kahn via Barron’s

“Chip Anderson, president of StockCharts.com, wrote in a recent newsletter to users that current “emotional short-term reactions are really just part of a larger pattern.” According to his analysis, “The market has topped and is generally moving lower based on a rounding top pattern and the downward movement of the 40-week (200-day) moving average.

Michael-Kahn-030316

But Also Read: Bears Have Their Backs Against The Wall by Avi Gilburt via MarketWatch

And Read: Top 10 Reasons Investors Should Sell Now by Doug Kass via Real Clear Markets

2)  March Is Best Chance For Market Rally by Sue Chang via MarketWatch

“March may be the best chance yet for an S&P 500 rally if you ask Jeffrey Saut, chief investment strategist at Raymond James. History and an energy shift at the market’s gut level could be the triggers.

 

Saut believes the stock market bottomed in February. ‘The first week of March should see the market’s ‘internal energy’ rebuilt for another try on the upside,’ he said in a report.”

But Also Read: March Madness by Lance Roberts via RIA

SP500-Best-WorthMonth-Analysis-030116

3) Weak Economic Data Aligns With Market by Chris Ciovacco via Ciovacco Capital

“The shorter-term data tracked by our market model has seen noticeable improvement over the past two weeks. The longer-term picture, looking out weeks and months, continues to be concerning. Therefore, until more meaningful improvement starts to surface, our allocations will continue to have a defensive slant.”

Also Read: Two Reasons Stocks Are Headed Higher by Anthony Mirhaydari via Fiscal Times

But Don’t Miss: 2008 Revisited by Nouriel Roubini via Project Syndicate

4) Three Weeks Later, Gundlach Cashes Out Of Rally by Tyler Durden via Zero Hedge

“In an interview with Reuters Jennifer Ablan after DoubleLine Capital’s February flow figures were released (it was a $2.2 billion inflow) , Gundlach said the firm is now considering closing out some of its long positions in the stocks that they purchased three weeks ago.

 

Is the bond trader now just a closet equities daytrader? We wond’t know, but since the S&P 500 has jumped 8% in that period, why not takes some profits.

 

“That’s what we’re talking about,” Gundlach said about booking some gains after their short-term rally.

 

Gundlach still maintains that the U.S. stock market is in a bear market but had made those equity purchases because the conditions in the second week of February with “wickedly negative equity sentiment were such that risk/reward favored a potential tradable rally and also made such a low allocation less advisable.”

 

The time to buy the dip, however, has passed: “I am bearish. There are just wiggles and jiggles in the markets.

Also Read: The Best Offense Is A Good Defense by Adam Koos via MarketWatch


CHART OF THE DAY: McCellan Oscillator Over 90 by Northman Trader

Northman-McClellan-Oscillator-030316


5) Sunshine, Lollipops And… by Bill Gross via Janus Capital

If negative interest rates fail to generate acceptable nominal growth, then the Milton Friedman/Ben Bernanke concept of helicopter money may be employed. How that could equitably be distributed nationally or worldwide I have no idea, but the opinion columns are mentioning it more and more often, and on Twitter, the “Likes” are increasing in numbers. Can any/all of these policy alternatives save the “system”? We shall find out, but current evidence of the past 7 years’ experience would support only a D+ report card grade. Barely passing. As an investor though – and as a citizen in this election year – you should be aware that our finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.

 

Investment implications? Do not reach for the tantalizing apple of high yield or the low price/ book ratio of bank stocks. Those prices are where they are because of low/negative interest rates. And too, do not reach for the seemingly momentum driven higher prices of Bunds and Treasuries that negative yields have produced. A 30 year Treasury at 2.5% can wipe out your annual income in one day with a 10 basis point increase. And no, you can’t go to a bank and demand your cash for a fear of being labeled a terrorist. Seems like you’re cornered, doesn’t it?

Also Read: This Is Nuts, When’s The Crash by David Keohane via FT Alphaville


OTHER GOOD READS


“Bull markets die with a whimper, not a bang.” – Anonymous


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P.M. Links: Romney vs. Trump, L.A. Police Investigating Knife Found on O.J. Simpson Property, U.S. Naval Forces Dispatched to South China Sea

  • Donald Trump likes to say that if he’s elected president he’s going to build a border wall and make Mexico pay for it. Mexican Finance Minister Luis Videgaray thinks not. “Under no circumstance will Mexico pay for the wall that Mr. Trump is proposing,” Videgaray said this week. “It is an idea based on ignorance and has no foundation in the reality of North American integration.”

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Stocks Surge On Biggest Bear Market Short-Squeeze Since Nov 2008

They are pulling out all the stops on this one…

 

Another chaotically wild week…

  • Small Caps (Russell 2000) up 4.65% – biggest week since Oct 2014

  • S&P 500 up 3% – best week in 3 months
  • Dow Transports up 3.7% – best week since Dec 2015
  • "Most Shorted" stocks up 8.8% – biggest short squeeze since Nov 2008 (and in 3 weeks "Most Shorted" are up 19.8% – the most ever)

  • HYG (high yield bond ETF) up 2.3% – best week in 5 months (best 3 weeks since Dec 2011)
  • 2Y, 5Y, 10Y, 30Y biggest weekly surge in yields in 4 months
  • 7Y biggest weekly surge in yields in 9 months
  • Aussie Dollar soared 4.25%  – the biggest week since Dec 2011
  • Oil up 9.6% this week – 2nd biggest week since August
  • Oil up 21.2% in 2 weeks – biggest 2 weeks since Jan 2009
  • Copper up 7.2% – biggest week since Dec 2011
  • Gold up 3.5% to 13 month highs
  • Silver up 5.8% – biggest week since May 2015

 

Ahead of China's National People's Congress, Chinese stocks were 'lifted', but as is clear, the intervention was aimed at mega caps and not the tech-heavy small caps of ChiNext and Shenzhen…

 

Which lifted stocks into the payrolls print…and then the chaos began

 

After the initial weakness, stock were panic-bought only to snap at 2pmET on possible Fed limits on banks…Dow tops 17000 at the close, but S&P lost 2000 right at the bell.

 

Still a crazy week… with Trannies and Small Caps dramatically outperforming…

 

Dow 17000

S&P 2000

 

As Most Shorted soared again…

 

Energy & Financials outperformed… but note that when The Fed headlines hit, things stalled…

 

The reaction to payrolls was all over the place…

 

For the first time in 2 months, XIV (inverse VIX ETF) is trading below VXX (VIX ETF)…

 

Treasury yields spiked after the "better-than-expected" jobs data with the belly underperforming in the week (and 2s adn 30s outperforming – though still out 10bps)…

 

5Y yields touched the 50DMA back within their 4 year range…

 

The USD Index dropped (led by strength in EUR and cable, but Aussie Dollar was the big mover)

 

In fact Aussie Dollar was the biggest gainer of all major FX this week – up a shocking 4.25% – the most since Dec 2011, to 8 month highs…

 

Commodities were all on fire this week…But crude just melted up…

 

Gold closed at its highest in 13 months…

 

Finally, we note several risk assets at or near their 200 Day Moving Average: Credit Suisse comments on the slightly uncanny fact that so many risk assets now at their 200DMA (just highlights further the high level of correlation between asset classes).  Brazil is now +26% from its lows and sitting right on its 200d. Glencore +104% from its lows, and on its 200d. Kumba Iron Ore +225% from its lows and on its 200d. Turkish equities +14% from their lows and on the 200d. Copper is only 2% below its 230 level. S&P500 only 1% below its 200d, so perhaps more interesting are two assets that stick out as still having significant upside: OIL 200d is at $43 and finally the ESTOXX AT 3300

 

Charts: Bloomberg


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HY Credit Spreads Have Never Been This High Outside Of A Recession

Today marked the 13th consecutive day of positive HY fund flows (bringing total to $8.6bn)…

 

But as Credit Suisse explains, the nature of this demand is 'different'…

Investors likely using the ETFs as a placeholder for cash in the absence of new supply, with HY issuance down ~74% year on year.

 

With ballooning ETF inflows the past few weeks, the liquid sector has become increasingly vulnerable to ETF cash rotating out upon the availability of new supply.

 

This is particularly a concern now as the visible issuance calendar for the next few months has grown sizeably (~$35bn)

So put another way – given that the calendar is set to pickup, this huge inflow of 'placeholder' cash will flow out of high yield ETFs (pushing prices lower) and into the new issuance.

But, as Edward Altman warns Goldman Sachs, however, that we are already at the end of the benign cycle or nearing it.

We are in the bottom of the 8th or 9th inning, and unless the Fed steps in to add liquidity to the market, which seems unlikely, I don’t expect extra innings.

 

I define a benign cycle as having four ingredients:

  1. default rates below their historical average,
  2. relatively high recovery rates in the event of defaults, making the loss given default low,
  3. low yields, giving borrowers incentives to utilize debt financing, and
  4. ample liquidity. Liquidity is difficult to measure, but in benign cycles, firms of almost any credit quality are able to borrow easily.

Looking at those four factors, three are pointing toward the end of the benign cycle. Recovery rates are below their historical average, mainly driven by the oil and gas sector. Spreads are above their historical average—currently around 750bps in high yield vs. a historical median of about 520bps—meaning that investors are no longer providing capital at cheap rates; and liquidity is much more restricted than even a few months ago, with the marginal company having all sorts of problems raising capital at low interest rates. The only indicator that isn’t implying a complete end of the cycle is the default rate on high-yield bonds or leveraged loans, which remains below the historical average. However, it is climbing and—according to my forecast and most economists and market observers—likely to rise above the historical average this year for the first time since 2010.

 

Therefore, by just about any metric, the benign cycle seems to be over, so we are entering more of a stressed cycle. We are not yet at point of crisis or distress, though, and it remains to be seen whether we will get there.

And the bubble has plenty of room to burst…

To some extent, this bubble reached a high point in the third quarter of 2015. Starting in the fourth quarter, new issuance dropped and very risky companies, B- and CCC companies with very low Z-scores and very high yield spreads, were no longer able to raise money at almost any rate. As a result, new issues since then have not been as poor in credit quality. But the bubble is still sitting there—even if it isn’t getting bigger—and is pretty inflated, though not necessarily ready to burst unless we have a recession. People say that as long as the economy remains relatively robust, we don’t have to worry about a bubble. I am not quite as confident. But if we do have a recession in the US or a very major downturn in China in the next 12-18 months, there is no question that the bubble will burst, resulting in a mini or not-so-mini credit crisis.

And the corporate bond market is not small…

Recent improvement notwithstanding, IG and HY net leverage ratios remain above the medians of the last three decades… and high yield bond spreads have not traded at these levels outside of a US recession…
 

 

And even with recent strength, levels remain extreme…


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