Global Economy

Despite distressed-debt funds suffering their worst losses since 2008, mainstream apologists continue to largely ignore the carnage in the credit market (even though veteran bond managers have urged "it's not just energy, it's everything.") With the number of loan deals pricing below 80 (distressed) at cycle peaks, and "a less diverse group of investors holding a lot more bonds," price swings continue to be wild but as DB's Melentyev warns, initially "all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle."

Why Now?

The US is on its own and monetary expansion seems the only Holy Grail left...

November has been a banner month for black swans. From Leftist political coups in Portugal to terror attacks in Paris to downed Russian fighter jets in Syria, the market is gradually learning to expect the unexpected. In its latest Quarterly Economic Outlook, SocGen outlines five political and economic black swans that could land in 2016.

This is a commentary which should never have needed to be written. 

"The political left is happy to see people cross borders but would gladly restrict the flow of capital and goods. The political right is happy to see capital and goods cross borders but would gladly build a fence to restrict the flow of people. I’m afraid that the compromise might be to restrict people, capital and goods."

"This is the final spasm of a dying bull market that has been entirely fueled by central bank money printing. But if you look at the underlying trends both in the domestic and in the global economy and the outlook for earnings, everything that matters is heading south and the real global recessionary forces are just getting started."

Despite EU PMIs surging, US Manufacturing PMI has re-collapsed to 25 month lows as manufacturing employment showed "one of the smallest monthly gains seen over the past five years." The 52.6 print is below October's 54.1 and expectations of 54.0. Export orders saw renewed weakness and overall new orders, output, and employment slowed. Of course, hope remains that the Services side of the economy will maintain the dream of escape velocity but if last month's drop in Services PMI is anything to go by, it seems unlikely.

If the government’s official statistics are to be believed the U.S. economy is moving full steam ahead. Consumer are spending, the job market is expanding, real estate has recovered, stocks are soaring and the U.S. dollar is stronger than it has been in a decade. But if you have yet to realize it, billionaire investor Eric Sprott says "it’s all a lie." The manipulation of precious metals, coupled with the supply and demand fundamentals which Sprott says will lead to shortages over the next few years as mining companies reduce output or close up shop, will leave many investors who think their gold holdings are easily convertible to physical assets with nothing more than depreciating Yellen Bucks at exactly the moment they’ll need precious metals in their possession.

There’s an old adage among veteran stock traders that goes something like his, “If I told you the news before it were made public – it’s still a 50/50 bet you would guess the market’s reaction correctly.” That was when the markets had some resemblance of normalcy. Today, normalcy has been replaced with sheer lunacy as to the speculation and interpretations for where these markets go from here.

Fed Speak became hawkish to telegraph to financial markets that the December meeting was a potential live meeting for a rate rise.

As the poor get poorer, so the saying goes, the rich get richer; and until recently that was not just true, but apparently mandated so by The Fed. However, the last few months have seen the so-called "1%" appearing to struggle a little in their largesse. As we noted previously, not only are luxury jet values dropping for the first time since 2009, London mansion prices plunging, San Francisco home sales collapsing, fine-wine and diamond prices at 2009 crisis lows, and Sotheby's laying people off, but now, as Bloomberg reports, Swiss watches - the ultimate in luxury extravagance - have seen exports crash by the most since the financial crisis.

Importantly, while the "bias" of the market is to the upside, primarily due to the psychological momentum that "stocks are the only game in town," the mounting risks are clearly evident. From economic to earnings-related weakness, the "bullish underpinnings" are slowly being chipped away.