Is The Credit Cycle Over?

Tyler Durden's picture


No matter how much pushing on the market- or economic-string a central planner tries, eventually the risk-based pricing of credit (as opposed to nominal price based stocks) turns the corner from accepting rising leverage as potentially good thing for growth to worrying that cash flows are at risk from an over-generous management transfer to shareholders. The four-year bullish period of this credit cycle is nearing its historical average and leverage is near its cycle highs with near record numbers of firms raising leverage YoY suggesting the credit cycle is over.


Leverage is rising...


and pretty much every other credit metric is deteriorating...


and the credit cycle is getting long in the tooth...



It seems the only factor driving credit from not being wider based on these leverage and cycle indications is the 'flow' from the Fed. We suspect that is what has created the weakness in bonds recently (even though we note that cash bond markets have not weakened as much as CDS since managers are preferring to hedge than cover for now - since, quite bluntly, they know that if they all collaborate and don't sell then everything is fine but once one manager decides to cover instead of hedge, the small doors and large crowds will see major liquidity gaps appear in HY credit).

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 06/18/2013 - 15:26 | 3669144 fonzannoon
fonzannoon's picture

"quite bluntly, they know that if they all collaborate and don't sell then everything is fine but once one manager decides to cover instead of hedge.."

what if they don't ever sell. Ever?

Tue, 06/18/2013 - 15:37 | 3669172 Dr. Engali
Dr. Engali's picture

The "right" people will get out in time, for everybody else there is John Corzine.

Wed, 06/19/2013 - 00:06 | 3670411 jeff montanye
jeff montanye's picture

the pussy in the ad to my left looks sweet and ready for action (urban gardens/organic undies).  but on another note, the historical comparisons in the above post are too recent, imo.  since 2008, we have passed into the deflationary era which finds its most recent comparable in the 1930's.  if that data is included, the average credit cycles are shorter.

courtesy of john hussman (note the "shorter and more violent" opening of paragraph two and the shortening of bull markets from 4+ years to 3- years): Since 1940, the market has experienced 13 bull market advances of at least 25% from a bear market low, and 13 bear market declines of at least 20% from a bull market high. Bull market advances during this period have averaged a 123% price gain, a 162% total return, and a duration of 4.4 years. Bear market declines during this period have averaged a 35% price loss, a 32% loss including dividends, and a duration of 1.3 years. So dividends have helped to boost the bull market gains and mute the bear market losses to some extent, but with a dividend yield of just over 2% on the S&P 500, this effect is not very strong at present. Combining bull and bear markets, the average market cycle has averaged a 45% price gain, a 79% total return, and a duration of 5.6 years. This works out to an annualized total return of 10.9%, and an annualized capital gain of 6.9%, that gap being bridged by dividends, which have represented nearly 40% of total returns over time.


Pre-war market cycles tended to be shorter and more violent. Taking market history since the early 1920’s, the market has experienced 23 bull market advances of at least 25% from a bear market low, and 23 bear market declines of at least 20% from a bull market high. Taken together, bull market advances during this period have averaged a 102% price gain, a 129% total return, and a duration of 2.9 years. Bear market declines during this period have averaged a 37% price loss, a 35% loss including dividends, and a duration of 1 year. Combining the two, the average market cycle has averaged a 27% price gain, a 50% total return, and a duration of 3.9 years (which is why market historians used to think in terms of a standard “4-year cycle”). All of this works out to an annualized total return of 10.9%, and an annualized capital gain of 6.3%.

Tue, 06/18/2013 - 15:42 | 3669181 flacon
flacon's picture

The assets are "sold" into another "buy". When you buy gold and silver are your actually buying it or are you selling dollars? When a manager sells is he selling or is he buying dollars? 

Tue, 06/18/2013 - 15:43 | 3669182 LawsofPhysics
LawsofPhysics's picture

Selling is already banned in many cases. There are already huge penalties for withdrawing early from a 401k Fonz.  It has long been hotel california.  Moreover, in a "debt is money" system, credit must increase, or the oligarchy loses power and control.  That's what this is really about, power and control over resources (including the human kind).  This is why the "education" system encourages sheep-like behavior and discourages free/critical thinking.

Tue, 06/18/2013 - 15:52 | 3669194 Spastica Rex
Spastica Rex's picture


What kids are really taught is that too much is never enough and all the important things in their future lives is advertised on TV. 

/former education bureaucrat

Tue, 06/18/2013 - 16:14 | 3669274 whisperin
whisperin's picture

Ah, but remember the Boomers are starting to retire in droves ergo the penalty most likely does not apply as they are over 59.5.

Tue, 06/18/2013 - 17:05 | 3669399 LawsofPhysics
LawsofPhysics's picture

When there is no fear of prosecution, bankers will always change the rules.  The death tax will be 98%, kids get nothing.

Tue, 06/18/2013 - 19:33 | 3669672 Totentänzerlied
Totentänzerlied's picture

Persecution is far more effective than prosecution.

Tue, 06/18/2013 - 17:06 | 3669402 LawsofPhysics
LawsofPhysics's picture

that which cannot be sustained, won't be.  Meh.

Tue, 06/18/2013 - 16:20 | 3669293 NoDebt
NoDebt's picture

"what if they don't ever sell. Ever?"

Then expect another round of bank bail-outs (bail-ins) immediately following the discovery that "Mark to Unicorn Accounting" was done on a much grander scale than anyone could have imagined and on far more asset classes.  Not billions this time.  Trillions.

When you can't sell, you cover up the magnitude of the losses however you can.  Then one day an unexpected beam of truth shines in, quite by accident, and burns the whole thing to the ground in minutes.

Tue, 06/18/2013 - 15:27 | 3669146 Yen Cross
Yen Cross's picture

   excuse me for occupying the top of this thread. (little multi-legged creatures"), clawing at me?

  Relax fellow traders, tapering is like licking chocolate from a fountain. Needs to be heated and tempered ;-)

Tue, 06/18/2013 - 15:27 | 3669147 TrumpXVI
TrumpXVI's picture

So, everybody is playing a ponzi version of poker; ponzi-poker, poker-ponzi.  And everyone's holding a bust; a pair of twos.

Tue, 06/18/2013 - 15:34 | 3669163 Yen Cross
Yen Cross's picture

     Coming from a guy that spent m&m's on a 757?  We serious traders have better things to do, 'Dr. comb over'.

Tue, 06/18/2013 - 15:35 | 3669168 ParkAveFlasher
ParkAveFlasher's picture

Print more threes.

Tue, 06/18/2013 - 15:27 | 3669148 Groundhog Day
Groundhog Day's picture

So is this good for bonds or bad for bonds? i'm confused

Tue, 06/18/2013 - 15:28 | 3669154 Rustysilver
Rustysilver's picture

Add me to the list.

Tue, 06/18/2013 - 15:29 | 3669157 THX 1178
THX 1178's picture

I dunno do you want a collapse or not?

Tue, 06/18/2013 - 15:30 | 3669160 madbraz
madbraz's picture

Depends.  If you ask CNBC, it's always bad for bonds and always good for stocks.  If you ask zerohedge, it's always good for gold.


There are bonds and then there are bonds.  The ones Wall Street tries to sell to you are bad.  Those are obviously not treasuries.

Tue, 06/18/2013 - 16:00 | 3669223 NotApplicable
NotApplicable's picture

Why not both?

Coherence is overrated anyway.

Tue, 06/18/2013 - 16:09 | 3669255 smartstrike
smartstrike's picture

The one who got the bond picture right is Rosenberg. He is now bearish. I am not sure if hit the exact low, but that was close.

Tue, 06/18/2013 - 15:28 | 3669153 madbraz
madbraz's picture

The profit opportunities are so enticing on the bear side that certainly a few large players will eventually jump at it.  If they don't, they won't get their alpha moving forward.

Tue, 06/18/2013 - 15:29 | 3669156 gjp
gjp's picture

Nothing matters except what Ben Bernanke had for breakfast.  So it goes in the land of the free.

Tue, 06/18/2013 - 15:34 | 3669165 sunny
sunny's picture

The whole situation is really, truly awful.  That's why the markets are up ~1% today.


Tue, 06/18/2013 - 15:36 | 3669170 Yen Cross
Yen Cross's picture

 The credit cycle has been blown out since 2000. Bernanke has expanded the money pool to fight the inevitable.

Tue, 06/18/2013 - 15:39 | 3669174 lolmao500
lolmao500's picture

Meh, all is bullish.

Convoy Of Hundreds Of Egyptian And Jordanian Jihadists Arrive In Syria To Fight Assad Regime And Hezbollah…

A small first group of what are thought to be several hundred volunteers who are receiving some basic training in Jordan are filmed on Syrian soil.

The volunteers are from Jordan and Egypt, and they are pledged to do what they can to resist the mass slaughter of Sunni Arab males, females, children and infants in southern/SE Syria.

Video :

Tue, 06/18/2013 - 15:44 | 3669186 El Viejo
El Viejo's picture

Nice music.  Is that Fleetwood Mack??

Tue, 06/18/2013 - 16:03 | 3669234 roadhazard
roadhazard's picture

I love Muslim on Muslim violence.


Lets all say it together, ALLAAAAAAAAAHHH !



Tue, 06/18/2013 - 15:39 | 3669177 Dr. Engali
Dr. Engali's picture

Somebody needs to kick the ten year in to see if it's still alive.

Tue, 06/18/2013 - 16:16 | 3669282 SheepDog-One
SheepDog-One's picture

Nevermind the gimp show in the back alley....over in the big top we got the Spectacular Dancing Bull Equities show!!

Tue, 06/18/2013 - 15:40 | 3669178 yogibear
yogibear's picture

Every time the Bubble Bernanke Fed's POMO show is on television the market rallies. Expect more of the Fed appearances and pump rallies to counter any negative market moves. 

Bernanke will bring his sidekicks, Evans, Bullard and Dudley to really juice the market to the shows.

Tue, 06/18/2013 - 15:40 | 3669179 adr
adr's picture

An entire bull market cycle without anyone other than the 10% feeling it. Where real employment fell throughout the entire thing. Millions more people entered poverty, and millions of retired people had to go back to work. Millions of your people went hundreds of thousands in debt, and had no better job prospect than flipping burgers at Wendy's.


We need a downturn quick. I can't wait to see what the next bull market brings!!!!!

Tue, 06/18/2013 - 15:57 | 3669212 gratefultraveller
gratefultraveller's picture

How to hold Washington accountable using the Racketeer Influence & Corrupt Organizations Act

Tue, 06/18/2013 - 16:02 | 3669229 NotApplicable
NotApplicable's picture

Well, hey, it worked for Jim Trafficant. Too bad it didn't work out for him.

Tue, 06/18/2013 - 16:06 | 3669242 roadhazard
roadhazard's picture

"His hair was perfect". ~ Warren Zevon

Tue, 06/18/2013 - 16:15 | 3669278 SheepDog-One
SheepDog-One's picture

Yea whatever the credit cycle is over I'm we'll definitely see another 1% across all equities and bonds again tomorrow then. Whatever.

Do NOT follow this link or you will be banned from the site!