Credit Markets

     

 

 

Loan Losses and Rumors

We want to briefly comment on recent news about a rise in loan loss provisions at US banks and rumors that have lately made waves in this context.

 

iceberg, ClevengerThe iceberg – an excellent simile for what we know and what we don’t know… or rather, what we don’t know just yet.

Image credit: Ralph A. Clevenger

 

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Trouble in High Yield Bonds Begins to Spread

It has become clear now that the troubles in the oil patch and the junk bond market are beginning to spread beyond their source – just as we have always argued would eventually happen. Readers are probably aware that today was an abysmal day for “risk assets”. A variety of triggers can be discerned for this: the Chinese yuan fell to a new low for the move; the Fed’s planned rate hike is just days away; the selling in junk bonds has begun to become “disorderly”.

 

288205Photo credit: ORF

 

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While the Stock Market is Partying …

There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007.

 

oil rigPhoto credit: Getty Images

 

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[Ed. note: for a change, we are presenting a post by a stock market bull below, namely Sid Riggs, via Bonner & Partners. It is always refreshing to see a well-reasoned argument that is contrary to one’s own opinion – after all, no-one really knows the future and Sid makes a number of important points, which deserve to be given attention. Sid is actually quite correct with respect to the historical correlation between rate hikes and the stock market. The strongest counter-points we can offer are these: 1. the market is extremely overvalued, 2. long-term positioning data show that everybody is “all in” already and 3. a rate hike would not be the first act of tightening monetary policy, but in fact the third. Act one was the “taper”, act two the cessation of QE. Given the paramount importance of money supply growth to stock prices, we would argue that the decisive factor will be whether or not commercial banks decide to expand credit.]

 

A Powerful Lesson from the Recent Past

There is a lot of lip service being paid to the stock market crash that we’re supposed to expect once the Federal Reserve starts raising rates. Every time we get close to a regularly scheduled Federal Reserve statement, financial pundits pontificate about the nuances of what the Fed chair might say, not say, or imply. It’s like clockwork.

 

 

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No-One is Paying Attention – Yet

Almost exactly one year ago, we penned several articles on what we believed to be a dangerous bubble in corporate debt. The boom in both prices and bond issuance was primarily driven by the desperate “hunt for yield” of investors starved of interest-income by the inane ZIRP and NIRP policies enacted by major central banks all over the developed world.

There is no need to rehash all the arguments we made at the time – as a refresher, readers may want to revisit “A Dangerous Boom in Unsound Corporate Debt” and “Comfortable Myths About High Yield Debt” for the details. So far, the potential dangers we identified at the time haven’t become fully manifest yet, but there are now signs that this may be about to change.

 

i promiseI promise!

Image credit: Minerva Studio

 

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Venezuela: Real Wages Collapse amid Continuing Crack-Up Boom

While the crack-up boom in Venezuela continues, real wages in the country have have utterly collapsed. The bolivar is still trading close to 700 to the US dollar on the black market, and the Caracas stock index keeps making new all time highs in nominal terms almost every day. Ironically, Venezuela’s currency is called the “bolivar fuerte” (VEF), i.e. “the strong bolivar” ever since it has been “reverse split” 1 for 1,000 in January 2008.

 

brain-drainImage via designlimbo.com

 

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Poor, Forlorn, and Neglected

Neither stocks nor gold moved much on Tuesday… “Wait and see,” remains the order of the day. The Greeks, for example, have 48 hours to come to terms with their creditors. We wait to see what will happen.

We wait to see what happens in the bond market, too. Have bonds topped out? Hard to say …   For six years the Fed and other major central banks have made a bad situation worse.

By promising to keep the cost of carrying debt ultra-low, they have encouraged governments and businesses to add trillions of dollars in debt to an already debt-drenched economy.

 

abeShinzo Abe, armed with his three arrows. He has so far managed to pump up the stock market and stomp on the currency, but he the third arrow has yet to find a worthy target.

Image via The Economist

 

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