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As we’ve covered earlier, Iran’s leadership in predictable fashion has accused the some 200,000 protesters which took to the streets over the past two weeks — triggered by a Nov. 15 sudden gas price hike of at least 50% (and in some place 300%) — of being willing dupes of external enemies, specifically the US, Israeli and Saudi Arabia.

This week as the mainstay of demonstrations were quelled amid an aggressive police crackdown, with some reports of security forces using live gunfire, both the IRGC chief and Ayatollah Khamenei took a ‘victory lap’ of sorts, claiming the dangerous ‘foreign conspiracy’ has been defeated. 

And now state media is attempting to offer its people ‘proof’ in the form of eight arrested individuals accused of being CIA assets. State news agency IRNA reported Wednesday that those detained “had received CIA-funded training in various countries under the cover of becoming citizen-journalists,” according to Iran’s Intelligence Ministry statements.

Though specific details have been predictably sparse, six of the accused were reportedly arrested on a charge of “rioting” while “carrying out CIA orders,” and two others were said to been caught trying to “send information abroad.” Ayatollah Khamenei had earlier in the day labeled the protests as driven by “thugs” who were playing into the hands of Iran’s enemies. 

“The people foiled a deep, vast and very dangerous conspiracy on which a lot of money was spent for destruction, viciousness and the killing of people,” Khamenei told a group of security officials responsible for quashing the protests. 

It appears this latest claim to have eight CIA assets in custody is connected to last week’s declaration by Secretary of State Mike Pompeo, who issued an unusual call for Iranian protesters to send the United States videos and photos and other evidence “documenting the regime’s crackdown” on protesters.

Washington has not confirmed the extent to which Iranian activists and protesters have actually heeded this call, but it looks like Iranian authorities are using the US Secretary of State’s invitation to round up ‘citizen-journalists’ who have sought to upload videos to social media, despite a nationwide internet outage for over a week in effect, initiated by Tehran authorities.

I have asked the Iranian protestors to send us their videos, photos, and information documenting the regime’s crackdown on protestors. The U.S. will expose and sanction the abuses. https://t.co/korr5p0woA

— Secretary Pompeo (@SecPompeo) November 21, 2019

 State authorities and media have since saturated the air waves with accusations of a ‘dangerous foreign plot’ afoot, as Al Jazeera summarized of the latest statements: 

Interior Minister Abdolreza Rahmani Fazli estimated as many as 200,000 people took part in the demonstrations, higher than previous claims. He said demonstrators damaged more than 50 police stations, as well as 34 ambulances, 731 banks and 70 gas stations in the country.

“We have individuals who were killed by knives, shotguns and fires,” Fazli said, without offering a casualty figure, in remarks published by IRNA.

The truth is probably somewhere in between: real domestic economic grievances (following months of debilitating US-led sanctions) and legitimate charges of corruption, but which external actors desirous of regime change have sought to hijack. 

It should be noted that Washington has from the start consistently voiced support to the protests, sparked initially by the economic crisis in the sanctions-wracked country. The death toll climbed to an estimated 200 dead as protesters clashed with police over the past two week; but those prior mass anti-government demonstrations — which included the burning of banks and gas stations — were largely supplanted at the start of this week by pro-government rallies. 

Via SchiffGold.com,

Peter Schiff hit a number of subjects in his most recent podcast, including bitcoin, the stock market, wealth inequality, the Fed and the voting age. He also said we should be thankful for capitalism.

Stock markets hit record highs again this week. Some of it was due to more optimism about a trade deal. Peter said he underestimated the impact of QE4 on the markets.

I mean, I knew QE4 was coming. I was 100% sure of that. I knew the Fed was going to cut rates, and they’ve been doing that. I just kind of underestimated how much upward pressure it was going to put on the US stock market. I actually thought that the dollar would be falling as a result of the Fed surprising everybody by doing exactly what I expected, which was cutting rates and going back to QE. Well, they did exactly what I expected, except the dollar hasn’t gone down. But I just think I want to add ‘yet.’ The dollar hasn’t gone down  – yet. Because it is going to go down and when it falls, it’s going to drop like a stone. And I don’t think that’s going to be a positive for the US stock market or the US bond market, and we’re going to see a much bigger move up in the price of gold.

Peter said a lot of people who are making money in the US stock market think they’re smart, but they’re not.

If they were smart, they wouldn’t be in the stock market. Or if they’re in it, they’re simply in it as a momentum trader that say, look, I know this is BS, but hey, they’re a bunch of idiots buying stocks, so I’m going to buy stocks now so I can sell to these idiots, and I’m going to get out the door before they realize the market has turned.”

Peter also talked about Minnesota Fed President Neel Kashkari. He is one of the most dovish central bankers at the Fed. In a recent speech, Kashkari suggested that the central bank might be able to use monetary policy to address wealth inequality.

I really thought that was rich because one of the reasons we have a widening gap of wealth inequality is because of the Fed and because of the policies that Neel Kashkari advocates.”

Creating inflation – debasing the money – is a transfer of wealth from savers to debtors. When Peter says debtors, he doesn’t mean the typical American consumer. He means people who have levered up to buy real assets.

When you buy an asset and you incur debt, inflation makes you rich because it wipes out the value of the money you borrowed and now you’re left with the real asset that you purchased. But who gets wiped out? The savers. Who are the savers? The average guy who’s got a 401K or a pension. He’s got an annuity. He’s got cash value in life insurance. He’s got bonds. He’s got some savings — he’s getting wiped out. And so the people who levered up to buy assets, which are generally richer people, have gotten richer, and the people who haven’t done that, who aren’t as sophisticated, don’t have the incomes or the assets to do that, you know, they’re just trying to save their money. Well, they’re getting eviscerated.”

Fed policy also transfers wealth from wage-earners to speculators. And it encourages consumers to take on debt by flooding the market with cheap money.

I think it’s really ridiculous for the Fed – I mean, this is about the pot calling the kettle black – the Fed saying they’re going to do something about income inequality when they’re the reasons that we have more income inequality than would normally be the case.”

Of course, you can’t really have income equality in a free society. And even if you are going to embark on this misguided notion of “fixing” income inequality, how is the Fed going to do it? All it can do is print money!

Peter also talked about bitcoin and Michael Bloomberg entering the presidential race, and the voting age.

“What’s your prediction for how this ends?”

China has been very quiet this week (despite the biggest collapse in industrial profits ever)…

Source: Bloomberg

UK’s FTSE leads Europe on the week…

Source: Bloomberg

Most US majors ended the day higher led by Small Caps and Tech (but Trannies underperformed)

VIX ended the day higher along with stocks…

Shorts were squeezed at the open for the 4th day in a row…

Source: Bloomberg

The odds of a trade deal slipped lower today…

Source: Bloomberg

Treasury yields rose across the curve today, but the long-end outperformed (2Y +4bps, 30Y +1bps) and 30Y remains lower in yield on the week…

Source: Bloomberg

The yield curve flattened significantly with 2s30s now at its flattest in almost 2 months…

Source: Bloomberg

The dollar is up again today – the 7th straight day of gains (to highest since Oct 11th)…

Source: Bloomberg

Cryptos had a big day today, with most scrambling back into the green for the week…

Source: Bloomberg

It seems $7k is a floor for now in Bitcoin…

Source: Bloomberg

PMs were lower on the day as copper managed very modest gains. Oil was chaotic again…

Source: Bloomberg

Gold gave back most of yesterday’s spike…

WTI dropped on the inventory and production data but the algos bid it back…

Probably nothing…

Source: Bloomberg

Finally, this is easy… 2013 deja vu all over again…

Source: Bloomberg

…And S&P 500 at 4,000 by June 30th?

Source: Bloomberg

Why not! Well they better start printing money faster or else!!

Source: Bloomberg

Because it’s all about the fun-durr-mentals…

Source: Bloomberg

In The Fed We Trust!

Congratulations to the @FederalReserve! 😀 You’ve successfully created the most extreme, pre-collapse yield-seeking bubble in U.S. history! With lower return prospects than Aug 1929! While encouraging a debt bubble where half of all “investment grade” debt is one step above junk! pic.twitter.com/GHVdekrJWl

— John P. Hussman (@hussmanjp) November 27, 2019

 

The threat posed by a downgrade of billions (if not trillions) of BBB-rated investment grade bonds, making them “fallen angels” as they slide into “junk bond” territory and resulting in a bond market crisis due to forced selling mandates as the size of the junk bond market soars is hardly new: in fact we covered it for the first time about a year ago in “Hunting Angels: What The World’s Most Bearish Hedge Fund Will Short Next.”

Since then many have hinted that the tipping point for a credit crisis is imminent. Most notably perhaps, last May some of America’s top restructuring bankers, predicted that the day of reckoning is nigh. Take the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis, Bill Derrough, who said at a restructuring event that “I do think we’re all feeling like where we were back in 2007. There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time.”

“Even if there is not a recession or credit correction, with the sheer volume of issuance there are going to be defaults that take place,” added Neil Augustine, co-head of the restructuring practice at Greenhill & Co.

And yet, almost a year and a half later, the inevitable BBB downgrade avalanche and explosion in the size of the junk bond market has yet to happen.

Curiously, instead of encouraging complacency, yesterday former Goldman partner and current Dallas Fed president Robert Kaplan issued the starkest warning about surging levels of corporate debt and laid out a scenario where it could suddenly become a big problem for the economy.

“The thing I am worried about is if you get two or three BBB credit downgrades to BB or B, that could lead to a rapid widening in credit spreads, which could then lead to a rapid tightening in financial conditions,” Kaplan said in a Tuesday interview with CNBC’s Steve Liesman.

“We’re got a record level of corporate and to be specific BBB debt has tripled over the last 10 years,” he said on “Squawk Box.” “Leveraged loans as well as BB and B debt have grown dramatically.”

Kaplan’s warning can be summarized by the following charts, the first showing that corporate debt-to-GDP is back to levels which traditionally presage a recession…

… the second showing the tremendous increase in BBB-rated as a percentage of total…

… and finally the fact that despite its BBB rating, 55% of BBB corps should have a junk rating already based on leverage alone.

For those unfamiliar, total corporate debt has doubled from $5 trillion in 2007 to $9.5 trillion halfway through 2019. The biggest culprit for this surge: BBB-rated issuance as trillions in debt was sold in the past few years by “investment grade” companies who used the proceeds to buyback their stock.

Yet while we appreciate Kaplan’s warning, it’s finally time the Fed should acknowledge its role in drowning corporate American in debt thanks to its record low interest rates. Investors have pointed to historically low interest rates both as the reason for the high levels of debt and justification for not panicking about its size just yet (throw in the ECB’s monetization of corporate debt and the central bank hypocrisy explodes). The Fed has cut the overnight lending rate three times in 2019, most recently at its October meeting when it reduced the federal funds rate to a range between 1.5% and 1.75%.

The rest of Kaplan’s warning is familiar to most: the sudden drop from the lowest investment grade rating (BBB) to junk will trigger concern over the credit markets and spark a widening in spreads, since a majority of bond managers have hard limits on owning only investment grade bonds and being forced to liquidate junk bonds (the ECB itself suffered through a brief fallen angel scandal in December 2017 when its holdings of Steinhoff bonds crashed following a downgrade to junk).

General Electric has long been eyed as the largest company at risk of triggering such a domino effect, though company officials insist they are doing everything they can to prevent a credit downgrade. More recently, Ford was downgraded to junk and yet this historic event barely registered on the bond market.

“The problem with ’08-’09 was that the lenders were overleveraged. Right now, we have an issue where the borrowers are highly leveraged,” Kaplan added. “My concern is if you have a downturn where we grow more slowly it means that this amount of debt could be an amplifier.”

Yet for every Kaplan issuing a BBB warning, there are at least ten sellside research hacks, desperate to prove to their clients that a slew of BBB downgrades is nothing to worry about (after all, their bond salesmen have to sell their holdings of soon to be CCCrap to someone). Some of the most frequent “justifications” used to explain why there is nothing to worry about are i) these are credit specific worries; ii) BBB rated banks will never be downgraded; iii) if you short the entire space you will be “negative carried” to death before the mass downgrade trigger event happens and iv) the companies are actually deleveraging so it is more likely BBBs will be upgraded rather than downgraded.

The common theme shared by all of the above “considerations” is that they can be effectively ignored as long as the Fed is easing financial conditions, as it is doing now. Of course, once the US finally enters a recession – and the Fed refuses to step in and push up capital markets, delaying the bursting of the bubble any more – none of the above will matter as the downgrade avalanche begins.

Meanwhile, for a surprisingly sober analysis explaining why Kaplan is right and BBBs are indeed the ticking timebomb in the US credit market, we go to the year ahead preview by Goldman’s chief credit strategist Lotfi Karoui, who has been increasingly pessimistic on the US credit market, and writes that going into 2019, he expected the tailwind from strong earnings growth would weaken, thereby leaving the ability and willingness to deleverage as the key drivers of the forward trajectory of credit quality. “This left us erring on the cautious side in terms of balance sheet quality.”

In the end, 2019 ended up surprising even Goldman to the downside. As Exhibit 12 shows, data through the end of the third quarter suggest that net leverage ratios for the median IG and HY non-financial issuer have resumed their upward trajectories, making new highs in HY and approaching the peak reached in the late 1990s in IG.  Unlike previous episodes, this re-leveraging has been mostly passive in nature, driven by weak profitability across most sectors.

Meanwhile, as overall corporate leverage approached record levels, for the low end of the IG rating spectrum, one of the side effects of the slowdown in earnings growth has been a delay to the deleveraging plans for most issuers, despite continued commentary emphasizing a focus on gross debt pay down.

And here is a stunning observation: for 48 of the largest non-financial BBB firms – a group which captures over $900 billion of index-eligible debt across the TMT, Healthcare, Food & Beverage and Industrial sectors – the average net debt to EBITDA ratio in the most recent 12-month period (2019) is actually 0.53x higher relative to year-end 2017.

While we acknowledge that there is a fair amount of dispersion in deleveraging progress among relatively smaller issuers, the verdict is still largely lackluster: only two issuers deleveraged by more than 1.0x turn, and only seven reduced leverage by more than 0.50x turn, since year-end 2017. For 2020, earnings growth will likely rebound; our US portfolio strategy team expects S&P 500 EPS growth will reach 6% by year-end 2020. But the forward growth trajectory will be much flatter by post-crisis norms, as profits adjust to a new reality where growth in unit labor costs outpaces price inflation. For credit investors, this will likely mean further delays in the debt reduction plans of over-leveraged companies, particularly for issuers with weak pricing power, and thus more dispersion in returns.

Looking at the chart above, Goldman concludes that “the verdict is still largely lackluster: only two issuers deleveraged by more than 1.0x turn, and only seven reduced leverage by more than 0.50x turn, since year-end 2017.” Meanwhile, Goldman expects that the forward growth trajectory will be much flatter by post-crisis norms, as profits adjust to a new reality where growth in unit labor costs outpaces price inflation. “For credit investors, this will likely mean further delays in the debt reduction plans of over-leveraged companies, particularly for issuers with weak pricing power, and thus more dispersion in returns.”

Said otherwise, since few if any corporations have been punished for incurring ever more debt – most of it being used to fund M&A and/or buybacks – companies have no qualms about issuing even more debt, and explains why almost nobody has deleveraged in the past two years.

Of course, once the longest expansion in history ends and the US economy finally reverses and rating agencies finally wake up and start downgrading companies en masse, that’s when CFOs and treasurers will scramble to do everything they can to reduce their leverage. Alas, it will be too late. 

Authored by Patrick Barron via The Mises Institute,

What causes the seemingly unfounded confidence in socialism we encounter more and more in the news media and among political activists? In the Extinction Rebellion movement, for example, activists are quite certain they have learned that there is an alternative to markets as the means to economic prosperity. It’s a means that does not involve meeting the legitimate needs of one’s fellow men in the marketplace.

It is likely not a coincidence that most people living today have lived most of their lives in a world dominated by fiat money. It has now been nearly fifty years since the United States broke all ties between the dollar and gold. It’s been even longer since other major currencies were tied to gold at all. Consequently we now live in a world where the creation of wealth is seen by many as requiring little more than the creation of more money.

In this kind of world, why not have socialism? If we run out of money, we can always print more.

Unlimited Money Feeds the Myth of Unlimited Real Resources

The world was on a watered down version of a gold standard until 1971 when the US abandoned its solemn promise — the 1944 Bretton Woods Agreement — to back the dollar with gold at $35 per ounce. Gold backing of a currency provided a solid intellectual foundation of reality that few even recognized existed within themselves; (i.e., that we live in a world of scarcity and uncertainty). This reinforced the idea that wealth has to be built. It cannot be conjured out of thin air, just as gold cannot be conjured out of thin air.

But fiat currency can be conjured out of thin air and in enormous amounts. The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply. Those who know only unlimited fiat money soon demand free healthcare and free higher education as a right. And why not? Unlimited money will pay for it. Into this never-never land comes demands for scrapping the fossil fuel underpinnings of our modern economy by those who understand nothing of how an economy works. But, apparently one does not need to understand technical limitations, because there are no technical limitations. The “barbarous relic” (gold) had once limited the money supply and thusly seemed to limit the supply of vendible goods. Gold has been replaced by unlimited fiat money. Now it seems that unlimited aggregate demand can be funded by unlimited fiat money, leading to a world of plenty. Designer of the Bretton Woods Agreement Lord Keynes says so in this very insightful short video.

Fiat Money Turns the World Upside Down

The psychological impact of a lifetime within a fiat money economy cannot be underestimated. One’s world is turned upside down. For many, financial success becomes prima facie evidence of exploitation of the masses rather than something to be admired and to which one could aspire also. With more wealth seemingly available at the click of a computer button, only an Ebenezer Scrooge would deny funding the latest demanded government program. If wealth is so easy to create, many conclude only greed and cruelty are what stand between us and far greater prosperity for all. 

But that is the very reason that fiat money is so subversive to the social order. In a sound money economy any new spending program can be funded only by an increase in taxes, an increase in debt, or by cutting existing funding. There is a real cost to each of these options. There is a real cost to printing money, too, but the cost is hidden. One does not see malinvestment at the time of money printing. Price increases are delayed and uneven, due to the Cantillon Effect whereby the early receivers of new money are able to purchase goods and services at existing prices. Later receivers or those who do not receive the new money at all suffer higher prices and a reduction in their standard of living. Even then most people do not link higher retail prices with a previous expansion of the money supply.

It would be hard to invent a more effective method for the destruction of modern society. As Pogo would say, “We have met the enemy and he is us.”

Ever since the Federal Reserve launched ‘Not QE’ and President Trump ramped up tweets and comments of an imminent trade deal since October (or in one tweet, a fake trade deal), the S&P500 has had zero pullbacks, simply, it has gone vertical. 

International Financing Review (IFR News) has said, “What is most striking about the rally is the lack of any correction despite plenty of concerns that a 2-3% drop is just around the corner.”

Refinitiv data shows that in the last 35 sessions, the S&P500 has gone without a 0.5% correction to the downside. 

“You have to go back all the way to Nov 2017 to see an environment where the lack of correction was greater than the current setup. Back then the S&P500 did not fall by more than 0.5% in a single day for 50 consecutive days. But don’t take our word for it, just look at the chart below that takes us back to June 2010 to see the extraordinary nature of the price action,” IFR said. 

President Trump’s “trade optimism” and the printing press at the Federal Reserve have also pushed a narrative that the global economy is going to rebound in the coming months, and a huge upswing will be seen across the world. Much of that is fantasy, as China’s credit impulse continues to roll over, and the global economy continues to decelerate, without China, there can be no massive upswing in the global economy. Though we don’t discount the idea, there could be stabilization; still, that would produce disappointment. 

All this excitement of possible trade deals, central bank liquidity, and the prospects of a massive upswing in the global economy in early 2020 have forced consecutive record shorts in the futures for VIX non-commercial spec positioning, with the latest print of -218,362 the highest on record. 

While nothing lasts forever, there are obviously imbalances that are building in markets that have been created on weak narratives, such as “trade optimism” and a global recovery – if for whatever reason one of those narratives breaks down, then perhaps, as Charles Hugh Smith via OfTwoMinds blog, explains: markets are in blowoff tops. 

We all know what happens next…