Since the corporate bond bubble has added more than a half year since I last updated its size potential, it is worth reviewing given the lack of enthusiasm in that space post-August 24. Even before that “dollar” run clocked China and the rest of the world, the corporate bubble was being dented by the larger “dollar” trend dating back to June last year (which is itself a part of the overarching trend going back to 2013, and really August 2007).
Total issuance this year is down across the board, but more so in leveraged loans than anywhere else. I have written before that I think it will be leveraged loans that are the primary fault-line dividing bubble and its reversion, so that seems to be holding this year as that leading edge. Through August, leveraged loan issuance (figures from LSTA) is down 22% from the same period in 2014. CLO gross issuance is off 15.5% (through July), while junk bonds have been floated at about the same pace (“dumb” money retail investors?).
The fact that the yield level (to maturity) for at least the names included in the 100 index (which is likely much more positive in its view of the overall leveraged loan condition) has gone from 4.47% (insanely low) in August 2014 to 5.53% this August (still insanely low) begins to put together the ominous picture. Either these low quality obligor companies can’t handle an extra 1% in borrowing costs or investors are now so wary of the decidedly non-transitory price momentum they have stepped out of the way by one-fifth. Neither is a particularly optimistic view of the state of the bubble. Continue reading
“In the last few days, Turkish Military units have entered northern Iraq in an operation against the guerrillas of the Kurdistan Workers’ Party (PKK). The Ankara government has defined it as land-based incursion and a “short-term” measure to finally “eliminate” the “rebels”. We are given to believe that Erdogan took the decision to intervene following the PKK attack in Igdir last Tuesday which killed 13 local police officers. But the truth is that for some months now, the Turkish army has being besieging the only entity that has demonstrated it is really able to stop the advance of ISIS.
And Europe stays silent, enclosed in a shell of hypocrisy and opportunism. The “popular resistance” cells have collapsed. They were formed last March when different member states (including Italy) gave the green light to sending in arms to the Peshmerga. Even the government stays silent. There’s not a word from Minister Gentiloni even while the Turkish air force is continuing an indiscriminate attack on rebels and civilians. This is not simply shameful. It’s showing the double standards used by the West where people are ready to tear their hair out when looking at the dead body of little Aylan, but where they are careful to stay silent when their own interests, or the interests of their allies are at stake.
In fact, Turkey is the only member that NATO has in the Middle East. It is in a strategic position (to the East it has borders with Armenia, Azerbaijan and Iran, to the South East it borders Iraq and to the South, Syria). The USA cannot do without it and the EU feels it has a duty to protect it. It doesn’t matter whether the game play involves the sacrifice of the fundamental rights of a people who for decades have been legitimately claiming their independence and autonomy. Continue reading
What the Fed really decided Thursday was to ride the zero-bound right smack into the next recession. When that calamity happens not too many months from now, the 28-year experiment in monetary central planning inaugurated by a desperate Alan Greenspan after Black Monday in October 1987 will come to an abrupt and merciful halt.
Why? Because Keynesian money printing is in a doom loop. The Fed’s ZIRP policies guarantee another financial crash, which will trigger still another outbreak of panic in the C-suites of corporate America and a consequent liquidation of excess inventories and labor on main street. That’s the new channel of monetary policy transmission, and it eventually leads to recession.
This upcoming recession, in turn, will prove beyond a shadow of doubt that in today’s financialized global economy you can’t manage the GDP of a single country as if it were isolated in an economic bathtub surrounded by high walls; nor can you attain domestic macro-targets for employment and inflation through the blunderbuss instruments of pegged money market rates and wealth effects levitation of the stock market.
Instead, the Fed’s falsification of financial asset prices simply subsidizes gambling in secondary markets; enables daisy chains of collateral to be endlessly hypothecated and re-hypothecated; causes vast misallocations and malinvestments of corporate resources, especially stock buybacks and other financial engineering; and sends money managers scrambling for yield without regard to risk, such as in junk bonds and EM debt.
What it doesn’t do is get households all jiggy, causing them to boost their leverage and spend up a storm. That’s because they reached “peak debt” at the time of the financial crisis, and have been struggling to reduce debt ever since. In the most recent quarter, in fact, household debt posted at $13.6 trillion or 3% lower than in early 2008.
Stated differently, the household credit channel of monetary policy transmission was a one-time Keynesian parlor trick that is now over and done. All of the Fed’s vast emissions of central bank credit have pooled up in the canyons of Wall Street, and have not triggered a borrow and spend binge on main street. Continue reading
In the chart below I’ve indexed real median personal income against real corporate profits (before tax w/o adjustments) to the beginning of 2009, the point at which central bankers implemented trickle down economics to rescue Americans from the largest gov/banking policy induced disaster in the history of the world. Let’s have a look at the results of the bankers trickle down strategy….
Go figure eh…. Anyone think moar QE is the answer?? We just won’t know unless we keep on trying I suppose… says Ms. Yellen and the Business Roundtable (click to see many of the very faces of those that reached their shifty little hands into the ass of the golden goose and pulled out trillions of printed dollars but left trillions in debt obligations for your grandchildren).
Anecdotally, for those of you that rarely leave the city, I was in a small town in Indiana not too long ago. I stopped to get a bite to eat and prefer local diners to fast food. Problem was almost every shop in what would have been a quaint downtown was boarded up. I asked a lady if there was still a place to get a bite to eat in town. She pointed me to the last shop at the end of the row. I went in, sat down, ordered some food and couldn’t help overhearing the guys talking at the table next to me. Continue reading
A Reasonable Risk-Reward Proposition
Obviously today’s FOMC decision (we are writing this shortly before the announcement) could result in a lot of short term volatility, but we nevertheless wanted to briefly remark on the gold sector’s technical situation. Here is a chart of the HUI (daily) with RSI and the HUI-gold ratio:
HUI daily and the HUI-gold ratio – a number of divergences have been recorded recently – via StockCharts, click to enlarge.
As you can see from our chart annotations, while the HUI has been oscillating near its lows, a number of (usually positive) divergences have been put in. The short term risk-reward situation is begging to be exploited. The recent lows near the 104 level are not very far from current levels, and can be used as a risk control level, a.k.a. a “stop”. In short, near term risk can be minimized as long as the index remains above this level.
Last Friday, this support level was briefly broken to the downside (the candle with the long lower shadow), but the index ended the day in positive territory and back above support. It is this event in particular that makes the current situation intriguing from a short term perspective. Continue reading
If we are being honest and using words as they exactly mean, the recovery actually ended in 2012. My sense of dating would mark that as March 2012 since so many various data series held that month for what has been a durable inflection. It was true not just here in the US, but across the globe as 2012 was a departure from the expectations about where all this was heading.
That meant what has been animating economic perception is not the recovery itself but rather dreams of what it might yet become. The entire point of “transitory” is to recognize, in some intentionally marginalized manner, the gap between what is and what should be. Even the whole point, in generic terms, of QE3 and QE4 was to raise the quotient of prediction about the future in recognition of the deficient past and present. There is always “next year” and QE was presented as insurance for it.
In that respect alone there was always expiration on the dreamworld. A less biased reading of China since 2012 would have that as the centerpiece of global expectations. From the Chinese perspective, after having pushed, as the orthodox textbook declares, perhaps the largest bubbles in human history all in the name of that recovery, to view the rest of the world renew the slump so soon after the Great Recession was a complete and total discredit to their intentions. Calling it a paradigm shift doesn’t actually capture the raw emotion of staring into that abyss; those bubbles were built to bridge the divide between the Great Recession and the “demand” levels that dominated before it as every orthodox economist on the planet assured. Continue reading