The Great Crisis
Membership in the Gloom and Doom Club guarantees that one will eventually see a correction, recession or worse. The Asian crisis of 1997, the dotcom bubble of 2000, the Great Recession of 2008 and the Eurozone crisis of 2011 will be followed by another crisis, which is currently in the making. Reckoning that 2008 was the start of the most recent recovery, biblical wisdom suggests that the seven fat years will be followed by seven lean years.
The necessary ingredients for the great crisis have been previously noted: deflation, huge sovereign debt, unwieldy corporate debt, an increasing bond spread, sagging commodity prices, a slowdown in China, huge injections of liquidity thanks to QE, near-zero interest rates since 2008, an apparent absence of inflation in the CPI although equity and real estate prices have increased. The central banks are now ill-prepared to fend off the next crisis as interest rates cannot be lowered any more while the Fed ruefully ponders increasing the prime rate though the dollar is over-valued.. The ECB and BoJ are still struggling to promote growth.

As soon as the Fed decides on even the slightest rise in interest rates, capital will flow into the already bloated dollar from emerging markets, thus tightening up credit, just as rising rates will make it more difficult for companies in dollar-denominated debt to .....

service their bonds. With US energy companies suffering because of low oil prices, OPEC members short of cash for the same reason, China slowing down from growth rates of more than 7%, the Middle East in turmoil and terrorists on a rampage, the scene is set for market turbulence and high volatility. Seasoned investors will react defensively and look for solutions to avoid drowning in the flood.

Gold bugs will rejoice as the yellow metal proves its worth as a safe haven when China reveals how much gold it has really piled up in the last ten years. Over-priced real estate may suffer somewhat, but bricks and mortar are hard to blow away. The big bad wolf will gobble up unwary asset managers who stayed too long in bonds that fetch ever lower prices as the Fed retraces the path to “normal” interest rates. Thanks to new trade agreements, American courts will reward government prosecutors with enormous amounts of cash demanded from foreign companies that failed to comply with regulations in favor of US intellectual property.

At the same time, the over-valued dollar will result in the volume of American exports falling to dismal levels. The US will export little oil because other producers will continue flooding the market as they are doing now. The crunch will come when EU courts rule against American IT monopolies and refuse to recognize the fines previously imposed on companies outside American territorial jurisdiction, thereby annulling the trade agreements that favor the US:

This scenario is possible and would mark a real crisis in the process of globalization. At the same time, China will be pushing the yuan to become an international reserve currency in place of the US dollar. If the American-dominated IMF refuses to admit the yuan to the privileged basket it seeks to jump into, China could react in ways that do not correspond to what the US would like.

The best of times may now lead to the worst of times due to the foolishness of central bankers who believe that interest rates and unlimited liquidity are the be all and end all of financial wisdom. The time is ripe for the US to be shaken. Gold, real estate, defensive equities and commodities are the ballast that will keep investors` ships stable in the coming storm. 

The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That

Tyler Durden's picture

One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to "BTFD", we presented a critical report by Citigroup's Matt King, who asked "has the world reached its credit limit" summarized the two biggest financial issues facing the world at this stage.
The first is that even as central banks have continued pumping record amount of liquidity in the market, the market's response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster. As King summarized it "models linking QE to markets seem to have broken down."
Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentallychanged and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.
The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining.
King's take: "there has been plenty of credit, just not much growth."
Our take: we have - long ago - crossed the Rubicon where incremental debt results in incremental growth, and are currently in an unprecedented place where economic textbooks no longer work, and whereincremental debt leads to a drop in global growth. Much more than ZIRP, NIRP, QE, or Helicopter money, this is the true singularity, because absent wholesale debt destruction - either through default or hyperinflation - the world is doomed to, first, a recession and then a depression the likes of which have never been seen. By buying assets and by keeping the VIX suppressed (for a phenomenal read on this topic we recommend Artemis Capital's "Volatility and the Allegory of the Prisoner’s Dilemma"), central banks are only delaying the inevitable.
The bottom line is clear: at the macro level, the world is now tapped out, and there are virtually no pockets for credit creation left at the consolidated level, between household, corporate, financial and government debt.
What about at the micro level, because while the world has clearly hit its debt-saturation point, corporations - at least the highly rated ones - seem to have no problems with accessing debt markets and raising capital, even if the biggest use of proceeds is stock buybacks, thereby creating a vicious, Munchausenesque close loop scheme, in which the rising stock prices courtesy of more debt, is giving debt investors the impression that the company is far healthier than it actually is precisely because it has more, not less, debt!
The reality, as we first showed in January of 2014, is that for all the talk of "fortress" balance sheets, and record cash buffers, the debt build up among US corporations has more than surpassed the increase in cash. In fact, as of early 2014, total debt was 35% higher than its prior peak, as was net debt.

Therefore, to us, the answer whether debt markets are once again approaching (or have crossed into) full capacity was clear; just look at what happened to IBM when, as we predicted, it bought back so much stock its investment grade rating was put in jeopardy and the company has seen its stock languish ever since unable to lever up any more just to repurchase its own stock.
Others, of the "more serious people" variety, have finally caught up, and as UBS' Matt Mish asks in a note late last week, "Releveraging: are debt markets approaching full capacity?"
His take:
In our latest strategy piece we concluded that, even in a stressed scenario, US and European high grade issuance could decline from peak levels yet overall activity should remain quite resilient. Well, that thesis could be tested in the coming months following a rash of (large) M&A announcements, including AB InBev's $106bn proposed acquisition of SABMiller, Dell's planned takeover of EMC, Sandisk's reported attempts to find a suitor and Analog Devices indicated to be in talks with Maxim. The phenomenon is straightforward, and one we have been touting for some time: firms are increasingly releveraging balance sheets as earnings languish. Wal-Mart is perhaps the latest example, issuing disappointing profit guidance as it seeks to spend significant sums on labor and the internet in an effort to reignite sales growth (and authorizing $20bn in share buybacks to boot).
It should be clear to most what this means, but since "most" haven't seen a rate hike in their Wall Street careers, here is UBS' summary "This is textbook later stages of the credit cycle."
* * *
Having seen the light, Mish asks why what is now so obvious to him, is so confusing to everyone else:
What we find interesting is that most issuers and equity investors do not consider the prospect that debt markets could be reaching a point of full capacity – at least not in the near term. There are two root causes of this belief, in our view. First, neither has a strong appreciation of the divergences between debt and equity market universes. First, equity investors typically focus on large cap benchmarks (e.g., S&P 500) – of which most of the market capitalization lies in the top 100 firms – and generally see strong balance sheets with low net leverage, many of which are rated single and double A. However, that is not what credit investors view in their own universe. By definition, while equity indices weighted by market capitalization have been biased towards higher quality companies which have low debt and high cash balances, debt indices weighted by debt outstanding have been skewed towards those issuers raising more debt and generally levering up(Figure 1).

In the US, this first occurred in US leveraged loans (and to a lesser extent high yield) – driven primarily by financially savvy private equity owners; now it is manifesting itself in high grade as strategics lever up balance sheets to juice earnings in an environment where hiking dividends (further), buying back (more) stock, and spending on capex (particularly overseas) appears to have diminishing marginal returns. Second, this cohort perceives low rates as a key stabilizer for financing costs. As we argued last week, low Treasury yields are a key source of support for high grade bond yields. In recent months, even as IG credit spreads have widened, government bond yield declines have helped soften the overall impact on funding costs. For high yield yields, however, the major component is credit spreads, so low Treasury yields can only do so much.

* * *

And releveraging and the underlying dynamics are not occurring in a US vacuum. In our opinion, European issuers and equity investors also do not fully appreciate the divergences in fundamentals between equity and debt markets. Our analysis shows median net leverage has been rising for European IG and HY companies for several years, while trends in median leverage for Eurostoxx 50 issuers have been more stable (until 2014, Figure 2).

Late last and earlier this year European credit investors are increasingly seeing US issuers selling Euro-denominated IG debt to fund M&A as well as viewing domestic issuers releveraging balance sheets (e.g., in technology, healthcare, consumer staples and telecom, Figure 3). And the general direction appears to be similar, whether we look at high grade or high yield (Figure 4).

For those who missed our preview of all of this from April 2012 "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement", here is UBS' far simpler summary which even 17-year-old hedge fund managers should get:
Here lies the problem. The predestined outcome is essentially a standoff between equity and debt investors where the former will continue to pressure the latter until credit spreads widen enough to cause capital market access to contract, stemming the deal flow. In high yield, the likelihood of reaching a breaking point is greater – we have seen instances where this has already occurred and equity investors could be complacent in this respect. However, in high grade, we reiterate that the markets are somewhat bulletproof. But the stakes are rising with each record deal. Near term, credit investors in aggregate will likely continue to hold their noses and absorb the releveraging until it becomes very extreme, though extracting wider spreads in the process. Unlikely, yes, in the next quarter or two; however, even in high grade we cannot envision this type of punishment lasting for a couple more years.
And that is the real countdown, because while the Fed may or may not have any credibility left, the only thing that matters is what is left of the once proud "bond vigilantes", virtually all of whom have been euthanized by the Fed's steamrolling of every last fundamental tenet of the market held dear by the bond trades and analysts of the world. According to UBS this, too, is now coming to an end, and even in IG the relentless issuance of one record debt deal after another, will soon hit a brick wall. That, coupled with the peak debt at the macro level described on top, will be the catalyst for the next phase in the evolution of centrally-planned capital "markets", whatever it may be.


10 commenti:

Anonimo ha detto...

Paolo, non dici nulla sul fatto che adesso anche S.Bassi dice che Renzi è l'unico votabile mentre il M5S sono i nuovi comunisti, proprio come diceva ML ed era stato criticato x questo proprio da S.Bassi? ML arriva prima dove gli altri arrivano dopo ;)

Anonimo ha detto...

giusto per commentarti la frase scritta all'inizio del sito.


il loro profitto???


e concludo qui per non insultare nessuno.

Anonimo ha detto...



probabilmente questa è una frase adatta ad un nobile francese, prima che una ghigliottina lo decapiti, durante la rivoluzione francese.

ML ha detto...

rido della tua o vostra stupidita'.....

Anonimo ha detto...

Ultim'ora by Icebergfinanza

(...) Arriva la notizia di una drammatica ristrutturazione aziendale di Deutsche Bank in seguito ad una improvvisa riunione del consiglio di sorveglianza della banca.

Anonimo ha detto...

I ricchi non entreranno nel regno di dio il loro posto sarà dove c'è stridore di denti e oscurità.

ML ha detto...

e i poveri che rompono il cazzo contro i ricchi moriranno definitivamente di fame amen

Anonimo ha detto...

ML politicamente scorretto è sublime ahah

Anonimo ha detto...

io non sono ricco, anzi
ma ho un profondo rispetto per i ricchi che si sono fatti da soli, molto meno rispetto per i figli di papà che vivono della ricchezza creata da altri.

Anonimo ha detto...

Non di solo pane vive l'uomo e non giudicare o sarai giudicato.