Sorry for the cliché, but the more things change, the more they remain the same.
Nowhere is this more painfully obvious than in the financial industry – where cracks are expanding in already porous credit dykes all over the world.
You think we'd have learned from the disastrous effects of the Great Recession 15 years ago.
But after additional years of excess from banks stuck with piles of buyout debt, a pension blow-up in the UK and real-estate troubles in China, South Korea and more recently the U.S., we’re finding again that what’s past is prologue.
Thanks to global central bank rate hiking, cheap money is quickly becoming a thing of the past.
Distressed debt in the U.S. alone jumped more than 300% in 12 months, according to Bloomberg News.
Plus, high-yield issuance is much more challenging in places like Europe, and leverage ratios have reached record levels.
The aggressive rate hikes have dramatically changed the landscape for lending – stressing credit markets and pushing economies toward recessions, a scenario that markets have yet to price in.
Nearly $650 billion of bonds and loans are distressed, according to Bloomberg.
It’s all adding up to the biggest test of the stress tolerance of corporate credit since the 2008 financial crisis and may be the spark for a wave of coming defaults.
Will Nicoll, chief investment officer at M&G, said, “It is very difficult to see how the default cycle will not run its course, given the level of interest rates.”
Banks say their wider credit models are proving robust so far, but they’ve begun setting aside more money for missed payments.
Loan-loss provisions at systematically important banks surged 75% in the 3rd quarter compared to 2021 – a clear indication they’re preparing for payment issues and defaults.
Most economists see at least a moderate GDP slump over the coming year.
Some, like Paul Singer of Elliott Management, however, fear a deep recession could cause significant credit issues because the global financial system is “vastly over-leveraged.”
Citigroup economists believe rolling recessions are likely across the globe next year, with the U.S. likely to slip into one by the middle of next year.
Mike Scott at Man GLG warned that “markets seem to be expecting a soft landing in the U.S. that may not happen.”
By Dave Allen for Discount Gold & Silver
Sorry for the cliché, but the more things change, the more they remain the same.
Nowhere is this more painfully obvious than in the financial industry – where cracks are expanding in already porous credit dykes all over the world.
You think we'd have learned from the disastrous effects of the Great Recession 15 years ago.
But after additional years of excess from banks stuck with piles of buyout debt, a pension blow-up in the UK and real-estate troubles in China, South Korea and more recently the U.S., we’re finding again that what’s past is prologue.
Thanks to global central bank rate hiking, cheap money is quickly becoming a thing of the past.
Distressed debt in the U.S. alone jumped more than 300% in 12 months, according to Bloomberg News.
Plus, high-yield issuance is much more challenging in places like Europe, and leverage ratios have reached record levels.
The aggressive rate hikes have dramatically changed the landscape for lending – stressing credit markets and pushing economies toward recessions, a scenario that markets have yet to price in.
Nearly $650 billion of bonds and loans are distressed, according to Bloomberg.
It’s all adding up to the biggest test of the stress tolerance of corporate credit since the 2008 financial crisis and may be the spark for a wave of coming defaults.
Will Nicoll, chief investment officer at M&G, said, “It is very difficult to see how the default cycle will not run its course, given the level of interest rates.”
Banks say their wider credit models are proving robust so far, but they’ve begun setting aside more money for missed payments.
Loan-loss provisions at systematically important banks surged 75% in the 3rd quarter compared to 2021 – a clear indication they’re preparing for payment issues and defaults.
Most economists see at least a moderate GDP slump over the coming year.
Some, like Paul Singer of Elliott Management, however, fear a deep recession could cause significant credit issues because the global financial system is “vastly over-leveraged.”
Citigroup economists believe rolling recessions are likely across the globe next year, with the U.S. likely to slip into one by the middle of next year.
Mike Scott at Man GLG warned that “markets seem to be expecting a soft landing in the U.S. that may not happen.”
The leveraged loan market has skyrocketed recently. Last year, $834 billion of leveraged loans were issued in the U.S., more than double the rate in 2007 before the Great Recession hit.
As demand has grown, so has the risk. In new U.S. loan deals this year, total leverage levels are at a record versus earnings.
There’s also an earnings recession on the ...
Critics, second guessers and Monday morning quarterbacks are speaking out en masse since the Fed’s 50 basis point rate hike on Wednesday.
In perusing mainstream headlines and articles since then, I’ve found that 9.5 out of 10 of op-ed writers, economists and other pundits believe that Chair Jerome Powell and his policymaking colleagues are on the verge of sending the economy into a recession.
They say, no ifs, ands or buts about it. The only question is, How deep and prolonged will the downturn and resulting pain be? In other words, forget about any soft landing.
The consensus of the naysayers is that the Fed started their quantitative tightening too little, too late. This side also argues that:
(1) The Fed’s projection of last year’s inflation surge being transitory was naïve (at best) and potentially catastrophic (at worst); and
(2) As a result, they kept interest rates too low for too long and kept buying Treasuries and mortgage-backed securities when they should have stopped that much earlier.
As the Federal Reserve converges on the nation’s capital this week for its last policymaking meeting of 2022, consumer inflation expectations are falling again.
According to the New York Fed’s latest Survey of Consumer Expectations, consumers expect a median inflation rate of 5.2% in the year ahead. That’s almost 0.75 percentage points lower than what they expected in October.
Over the next three years, consumers expect a median rate of 3% – a tenth of a percentage point lower than in October. And their median expectation over 5 years is slightly down at 2.3%.
The move downward reverses an increase in expectations shown in the prior month that, if unbroken, would certainly have given the Fed an excuse to continue with their 75 basis point rate hikes well into the new year.
The NYFed’s monthly survey is “a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads.”
According to the NYFed, “Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.”
As it is, there’s no guarantee that Powell & Co. will step down their aggressive tightening on Wednesday with a presumed 50bp increase – although Fed Funds futures traders believe there’s 75% chance of that.
That would take rates to a range of 4.25%-4.50% – up from 0%-0.25% before the campaign to rein in non-transitory inflation began in March.
As Courtenay Brown and Neil Irwin point out, perception is usually reality – that is, if consumers believe high prices will stick around, they can (and usually do) become a reality; the same goes for expected lower inflation.
Turns out that October's jump now appears to have been a blip on the radar screen of an otherwise months-long downward trend of inflation expectations – consistent with rising prices at the gas pump.
Fortunately, for consumers, the cost of crude oil and gas has been falling since late spring/early summer and is now an average $3.26 a gallon across the country (it was $4.99 in mid-June), according to AAA.
After hitting a 20-year high in late September, the dollar has been shrinking and fast.
The U.S. dollar index tracks the greenbill against a basket of six other major currencies – the pound, euro, yen, Canadian dollar, Swiss franc and Swedish krona.
It's down almost 10% (at 104.58 today) from its early fall peak of 114.53. That's the most the dollar has fallen in a 10-week time frame in over a decade.
Not coincidentally, gold hit its 2022 low of $1,639 on the same day the dollar hit its high. And since November 3rd – when gold matched its September low – the dollar has been steadily falling.
At the same time, gold has responded by hitting its highest point – just shy of $1,815 at New York lunch time today – since early July.
CEO sentiment among the largest companies in the U.S. has fallen for the fourth straight quarter this year.
Yet, those economic jitters have not sent CEO confidence jumping out of their high-rise offices.
In fact, Axios’ Courtenay Brown and Neil Irwin say their hiring and capital spending plans “are more consistent with growth slowdown than outright economic contraction” (aka recession).
The latest CEO economic outlook index from the Business Roundtable fell by 11 points to 73, continuing the gradual but steady slide that began in early 2022.
A look back shows that it's the first time since the pandemic was declared in 2020 that the index has fallen below its long-run average of 84.
Brown and Irwin note, however, that the current level “reflects a soft patch, but not a full-blown U.S. recession, like the Eurozone crisis in 2012 and a period of global economic softening in late 2015.”
We live in a world where nothing is as it seems. The things we are told on a daily basis, are either lies, distortions, distractions, or misdirection. Of course it’s always for an agenda. Our job so to speak, is to figure out what that agenda is, and often times, it’s not nearly as easy as you’d think.
I think this has been true for decades, but in the past they did their best to at least make it plausible. Don’t forget that 40 - 50 years ago, people really only had TV, Radio and the local newspaper to try and push what ever the agenda was. People were also “smarter” in a sense, and not as easily conned.
That last sentence was not hyperbole its simply fact. If you went back 50 years and asked a first year college student who the first President of the US was, they’d instantly know the answer. Or maybe ask, which President is on the 20 dollar bill? They’d know. They might be able to tell you about his life.
But today, there’s hundreds of videos, where people will go around with a microphone and ask these very basic questions to people on the street, and it’s absolutely stunning to hear some of the answers given. They have no clue, and I find it disturbing frankly.
Hi all, this letter might be a bit shorter than usual. Our office girl came down sick Sunday night, and now my wife’s a bit under the weather. I’m playing nursemaid. Anyway…
Last week, the day ahead of Thanksgiving, the minutes from the last fed meeting were released. Now let me set the stage for you all. On Wall Street, when a big holiday is on deck, the senior management usually gets a one or two day jump on things.
They get their Hamptons beach house all ready for guests and frolicking with much food and drink. And yeah, some coke might be found too. The point being that on the day before the true holiday, if the market is open, it’s not being manned by all the heavy hitters. No, they’re in their cozy beach homes, and keeping in touch via internet and phone with the juniors they’ve left to man the stations.
But usually the word given is “don’t rock the boat.” In other words, the major players don’t want the second string guys to do anything stupid and lose them money. So what usually happens is this…say the market has been trending slightly higher into that holiday. Well, those junior players will figure “hey, the market was inching higher when the bosses were here, we’ll just keep the motion going.”
This became pretty evident to me when those minutes hit. Yes there was talk in them about possibly slowing the “size” of the upcoming rate hikes. Wall Street apparently loves that idea. Why? Well they figure that if they’re no longer needing to stomp on the brake pedal with 75 basis point hikes, then surely that means they’re getting much closer to their target rate and soon they’ll do their pause and stop hiking.
So the report hit and the market which had slumped a bit perked up and ended the day nice and green. Even on Friday with the shortened market session, they eeked out some more gains.
But I didn’t read those minutes like they did. What came blaringly important to me was that most of them agreed that while they might chop down on the size of the hikes, the ultimate rate they think they want is HIGHER than they had previously considered. That to me was a major warning sign.
Let’s face it, there’s a decades old adage that says don’t fight the fed. I get it. When they’re cutting rates, you go with the flow and buy equities. When they’re hiking, you tend to sell down some. But here’s where I think they’ve misread the fed. What difference does it make how big each rate hike is, if your end goal is higher than you originally stated? For instance 2 75 basis point hikes is 1.5%, right? Well isn’t 3 50 basis point hikes the same? It is.
This week, we had what was almost comparable to the Cuban missile crisis. Yeah, it was dangerous to say the least.
So, what happed was that in Poland, a couple missiles landed, killing at least two people. Well Poland is a NATO country and Article 5 of NATO says that any member nation that is attacked, will be supported by ALL the member states.
Instantly the cries went out “Russia sent missiles to Poland!” The UK Express said this: Two people have been killed in Poland after two stray Russian rockets landed near the border with Ukraine. The rockets landed in the NATO state following Russia's mass bombardment of Ukrainian cities earlier today, which saw over 100 rockets launched.
According to the AP news agency, a senior US intelligence official said that the missiles were of Russian origin.
The UK Mirror blared this: Russian missiles land in NATO-member Poland killing two and causing 'crisis situation'
Two Russian rockets landed in a village in eastern Poland not far from the Ukrainian border, killing two people, as the country's top officials called an emergency meeting over the incident
Poland was adamant: The missile “attack” against Poland was clearly a crime, one that could not go unpunished!
As you can imagine that idiot gay actor playing President of Ukraine went ballistic, DEMANDING NATO act on this attack.
So, we talked about two things this past Wednesday, 1) are we looking at a “melt up” into year end and 2) what were we going to get with the CPI.
My feeling was simple. This is what I said: “So, the median call is for the CPI to come in +7.9%. The question is, what happens if it's higher or lower? If we get a lower reading of say 7.6 this market will rally hard. Maybe it would be short lived, but up we would go. “
Well I missed by a tenth, the report came in at +7.7%. And what happened? The market went nuts. We had the futures trading up 1000 points on the DOW before the open and we put in a 1,200 point DOW day.
Why? The current theory is that inflation has peaked, and this will give the Feds the green light to just do maybe one more 50 basis point hike and then go into pause mode. They thought the concept was just marvelous and they ran with it. Bigly so to speak.
First off let’s get a few things straight. The inflation we’re suffering from wasn’t because of overheated buying by us peon’s. It has TWO root causes. 1) the insane money printing/QE baloney the feds have been hammering us with for 12 years and 2) the insane supply chain disruptions resulting from them unleashing their bioweapon bullshit on us.
The money creation IS the very textbook definition of inflation. You don’t have to be a fellow of Lucasion mathematics to understand that. In fact if you go to dictionary.com and look up the word inflation, this is what you find:
Noun.
Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency
And there you have it. An increase in the volume (amount/printing) resulting in the loss of value of the existing currency. Bingo, give the dictionary a big cigar.
Earlier this week, I posted something to my readers that I thought was pretty interesting. Some of you have already seen this, but stick with me, as we're going to ponder on it some more. So, here's what I wrote on Sunday:
There's a financial planner/CPA that posts on twitter, who has a pretty big following. He's been involved in running a stock fund for years, and he's pretty sharp. So, the people that follow him, for the most part, are intelligent folks. He's not some 20 year old that got lucky in the 12 year bull market. No, he's been around for 30+ years and his dad was in the same business. So, he put up a poll for a day. Here's what he asked.
Which is more likely to happen in the stock market into the end of the year?
Melt-up....50.4%
Crash......49.6%
8,206 votes---Final results
So Friday was jobs day. The “Non-Farm payroll report” it’s called. And as usual, when the headline hit, it seemed acceptable. Well that’s what the headline’s supposed to do, give you a quick hit of “good” so that you wander off thinking things are pretty good out there.
They said that overall, 261,000 jobs were created and that was better than the estimates. Even taking out any Government employment, it was still up 230K, better than they hoped.
But as usual in this day and age, the report was total crap. Lies and distortions of epic scope. First off let’s look at that headline number. Okay so 261K jobs were created. Or… were they? Uhm, NO. In fact our friends at the BLS sprinkled so much of their fairy dust on the report, it was unreadable. Let me explain.
The Bureau of Labor each month takes verified job numbers, and counts them. But they also figure “hey there are probably jobs out there that we didn’t get proof of yet, so we need to calculate them into the mix.” This is called the “Birth/Death” model.
You can go to the BLS website and read the mumbo jumbo about how they come up with these extra jobs, but it’s an exercise in futility. They’ll give you all these fancy equations and academic mental gymnastics, and it won’t make a lick of sense. Let me sum it up for you…
Basically what they’re saying is that for every “X” amount of businesses that close (that’s the death part) Some “X” amount of those now unemployed employees, will go out and open “X” amount of new businesses. Well new businesses need employees, so they take a random-assed guess about how many that comes to also.
As you were handing out candy to – or walking the ghostly neighborhood among – the Nemos, Princess Ariels and Lightning McQueens, the Gouls and Goblins were scheming.
In fact, the fix is in – for another 75-basis point hike in the Fed Funds interest rate, that is. The horror of it all!
Even though 11% of Fed futures traders believe the Fed will raise its target rate by a mere 50 basis points on Wednesday, a 4th-straight increase of 0.75 percentage points is locked in.
The Federal Reserve just can’t help itself.
But Courtenay Brown and Neil Irwin say the more important thing to watch is what Fed Head Jerome Powell says at his post-meeting presser about what comes next.
They add that Powell and Co. face “a delicate balance” between signaling to Wall Street on the one hand that they will eventually slow down to “a more cautious pace of tightening” – without appearing to no longer being as committed to bringing down inflation on the other.
Just 12 trading sessions ago, the DOW was at a day low of 28,660. By 3 pm on Friday, it was at 32,834. A quick look at my calculator says that this means the DOW gained 4174 points. In 12 trading days.
For months on end, the market did a bunch of herky-jerky up and down chop, with a trend toward lower. But for “some” reason, it decided to run 4K points in just 12 days.
Now the point gain isn’t that impressive to me. For instance earlier this year the DOW ran from 29,653 to 34,281. That run was 4,600 points. But the difference is/was that it took 2 MONTHS to make that sort of move, not 12 days.
So, what’s up with this one? Where’d we get all this fire power from? Several things, so let’s chat about them.
On February 14, 1945 aboard the USS Quincy in the Suez Canal, Franklin Roosevelt met with Saudi king Abdul Aziz Ibn Saud — what began a near-78-year relationship between both countries.
In return for what the State Department cal access to a “stupendous source of strategic power, and one of the greatest material prizes in world history” — immense Saudi oil reserves — US ruling authorities guaranteed the Arab state’s security since that time.
Crude oil remains the main source of energy, including for fuel.
The US today is the world’s largest oil producer and consumer — while ranking 9th in known reserves.
Nations with the largest reserves include:
Venezuela with around 304 billion.
Saudi Arabia ranks a close second with 298 billion — followed by Canada at 168, Iran with 158, Iraq with 145, Russia with 108 and Kuwait with 102.
US reserves are around 68 billion — and because of strategic power afforded nations with large-scale amounts of oil — the empire of lies and forever wars seeks control over maximum amounts worldwide by whatever it takes to achieve its aim.
The bulk of this past week was truly boring. Yes we had stock market volatility and the almost "now-normal" gigantic swings, but overall there wasn't a lot new.
But then Friday happened and things became very interesting very quickly. So, what was it? All week the yield on the ten year had been flirting with 4%. It might do 4.1, then fade to 3.96, back to 4.00 etc. But Thursday night it really got moving again, and I think I saw 4.33 overnight. This is not supposed to be folks. Bonds are supposed to be stable. A place to park money and feel safe. Instead, the debt market has felt like it was on the verge of literally breaking.
So, Friday morning the futures were grumpy and we opened red. But then, out of the blue, we started racing higher. Obviously something was said or done somewhere, but where? Then "it" hit. The Wall Street Journal supposedly "leaked" from a source that the Fed's would indeed do 75 basis points in November, but then might only do 50 or even 25 in December. Thus, all those looking for the fed "pivot" were dancing like they were on Happy days.
Then we started to get some confirmation by no less than fed head Daly:
A newsletter for economic news, global trends, politics, money, and investment. Published on Wednesdays and Saturdays for subscribers. Get a free sample of our full issue, or Subscribe today.