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Deutsche Bank's Ominous Warning: A "Perfect Storm" Is Coming In 2018

Tyler Durden's picture




 

"We could now be at a crossroads," warns Deutsche Bank in its annual default study report. As the 'artificial bond market' is exposed and yield curves flatten on Fed rate hikes so carry risk-reward is reduced and default cycles have often been linked to the ebbing and flowing of the YC through time with a fairly long lead/lag. With HY defaults having spent 12 of the last 13 years below their long-term average (with the last 5 years the lowest in modern history), "a perfect default storm could be created for 2018 if the Fed raises rates in 2015."

Defaults will stay unusually low so long as current artificial conditions continue. However, as Deutshe Bank explains, the benign default environment of the last few years may be about to change...

HY defaults (using Single-Bs as a proxy) have now spent 12 of the last 13 years below their long-term average. The average for the last 12 years is now 1.5% (0.9% excluding 2009) against an average of 4.9% since 1983 (1983-2002 average 6.9%). In recent years we've explained this phenomenally low default environment by discussing the increasingly artificial demand for fixed income which has allowed more borrowers to access capital markets at cheaper rates. Although growth is currently low relative to history, funding costs are even lower relative to the past.

While nominal and real yields are likely to stay low in a world of heavy central bank intervention and ultra loose policy, we make the argument that yield curve (YC) changes could still contribute towards the next default cycle. In the US we have found that whilst lower and lower real yields have structurally lowered the default rate over the last 30 years, a flattening of the YC has proceeded the last three default cycles by around 30 months. We have created a simple model that uses real yields and the YC (UST 10yr-Fed Funds) to predict defaults. While there are limitations, it has been a good guide to turning points in the cycle.

The model suggests that whilst defaults may start to lift off their lows over the next year due to a steady rise in US real yields since late 2011 and YC flattening between March 2011 and April 2013, the HY default rate should stay below the long-term average through 2016 and into 2017 due to a resteepening of the YC between April 2013 and March 2014 when Fed QE 'infinity' was still ongoing. As we move into the latter half of 2017 things become more interesting as the flattening seen in the US curve over the last 15 months starts to have a more significant impact on the model. In 30 months time (Q3 2017) the model suggest a US HY default rate of 4.1% (1985-2015 average 4.7%, average since 2003 4%).

We could now be at a crossroads. In Europe, we've seen dramatic recent flattening with the anticipation and introduction of QE. This could drag the US curve still flatter in the months and quarters to come (currently in the middle of its historic range). A perfect default storm could be created for 2018 if the Fed then compounds this by raising rates in 2015. This could create a much flatter YC over the next year if the long-end reacts more to rock bottom European yields, low inflation, a shortage of high quality assets or fears of a policy error from the Fed.

Why does the YC impact the default cycle? Steep YCs tend to create maximum carry conditions which usually lead to net loosening in lending standards and a weakening in issuance quality in capital markets as overconfidence builds. As the YC flattens, carry becomes slowly less compelling and while stretching for yield/risk might actually intensify first, eventually a flat yield curve leaves the weakest entities looking much more vulnerable than they did at the YC's peak. Bank/investor risk tolerance reduces as the opportunity cost of carry trades increases and the risk-reward falls. This cycle does have a long lag but has been a repetitive feature of modern financial markets.

*  *  *

Perhaps the US Energy sector is the best example of this.

Without ZIRP, QE and a steep YC post-crisis, we probably wouldn't have had the extended boom in HY Energy issuance. Our US credit strategists suggest how important the shale and natural gas revolution has been to the US economy over the last decade. Will its reversal signal wider economic problems ahead? As we noted previously, a third of all US HY Energy Single-Bs and CCCs are at risk of some form of debt restructuring with Oil prices around these levels for a few quarters.

 

Survival of the fittest

 

Even with a 40% cut to their capex budgets, an average producer is forecasting a 10% increase in production volume this year. This provides another reason to believe that the oil industry's response to this point has been a necessary first step in the right direction but is unlikely to be the finish line in addressing this crisis.

 

Simple game theory helps us to understand their behavior: without a cartel and an ability to affect prices, each individual producer's best survival strategy is to produce as many barrels of oil as possible given the limited financial resources to be able to cover its revenue shortfall to the largest extent.

*  *  *

As The Telegraph notes, Deutsche Bank's warnings came as the International Monetary Fund said that the Fed's first interest rate hike could trigger a "cascade of disruptive adjustment".

 

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Wed, 04/15/2015 - 15:08 | 5995899 Roving reporter
Roving reporter's picture

Until then... BULLISH!

Wed, 04/15/2015 - 15:13 | 5995921 nuubee
nuubee's picture

I was going to say, I'll gladly take another 2.5 years to stack and create exit strategies. Postponing the armageddon is always welcome, and always works.

Wed, 04/15/2015 - 15:17 | 5995938 TruthInSunshine
TruthInSunshine's picture

Deutsche Bank, predictions are like assholes.

Now go get some more free fiat from the ECB & Fed.

Go on 'n git, ya hear!

Wed, 04/15/2015 - 15:18 | 5995946 nuubee
nuubee's picture

Clubber Lang said it best: "My prediction?.... Pain."

Wed, 04/15/2015 - 15:30 | 5995980 Pool Shark
Pool Shark's picture

 

 

"a perfect default storm could be created for 2018 if the Fed raises rates in 2015."

 

Oh, well,.. no problem then.


Wed, 04/15/2015 - 15:54 | 5996091 weburke
weburke's picture

the fed is set up to get the blame. 

Wed, 04/15/2015 - 16:55 | 5996335 Pliny the Elder
Pliny the Elder's picture

You gotta give DB credit for at least owing up to it. The others just keep BSing and expecing us to believe it. 

Wed, 04/15/2015 - 16:11 | 5996166 Kirk2NCC1701
Kirk2NCC1701's picture

Cool, until then we get to... 1. BTFATH and BTFD, and

2. Do Hypothesis Testing: DB Doomsday in 2018, or ZH Doomsday in 2015, 2016, 2017, 2018.

Place your bets.

Wed, 04/15/2015 - 16:46 | 5996292 20-20 Hindsight
20-20 Hindsight's picture

So the end of the world has been postponed yet again on ZH. What?  No global ebola pandemic?  You mean Fukushima's radioactive shit is still "x" number of years from destroying the planet?  Banksters, corrupt politicians and corporate military thugs still keep finding new ways to maintain the status quo?  Why am I not shocked and surprised?  

This is so hilarious... 2018 now.  I'm banking on that. 

Wed, 04/15/2015 - 17:19 | 5996418 Ignorance is bliss
Ignorance is bliss's picture

What's your hurry?

Wed, 04/15/2015 - 18:55 | 5996787 20-20 Hindsight
20-20 Hindsight's picture

No hurry at all.  I was being sarcastic.  :-)

Wed, 04/15/2015 - 17:20 | 5996420 G.O.O.D
G.O.O.D's picture

Do I hear a 19? I have a 19 now 20, I have 20 now 21 going once- twice i have a 21 now 22..  2022 going once , twice- sold to that ugly fvkin tribe member fiat printing elistist illuminati 33 degree freemason.

Wed, 04/15/2015 - 22:55 | 5997421 chilli sauce
chilli sauce's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Wed, 04/15/2015 - 15:11 | 5995911 NoWayJose
NoWayJose's picture

Brought to you by the guys that cannot even predict next quarter's GDP!

Wed, 04/15/2015 - 15:11 | 5995913 pods
pods's picture

Well, the good news is that things will have long collapsed by 2018.

Hell, in 2018, we might be saying "Worst consumer confidence numbers since Douchebank."

pods

Wed, 04/15/2015 - 15:12 | 5995915 RougeUnderwriter
RougeUnderwriter's picture

THe stock market will hit 30,000 before that happens

Wed, 04/15/2015 - 15:15 | 5995935 Osmium
Osmium's picture

You are talking about the NASDAQ hitting 30,000 correct?

Wed, 04/15/2015 - 15:17 | 5995941 nuubee
nuubee's picture

Dow 100,000!

Wed, 04/15/2015 - 15:15 | 5995923 Dr. Engali
Dr. Engali's picture

The solution is simple. We must have moar QE. Or is it moar cow bell? I get so confused without my afternoon nap.

Wed, 04/15/2015 - 15:15 | 5995927 Calculus99
Calculus99's picture

Armstrong is going for (starting in) October this year and lasting for 4 years, sorry I mean 4.3 years. 

Wed, 04/15/2015 - 15:17 | 5995943 Uber Vandal
Uber Vandal's picture

Has anyone ever questioned how wealthy this Armstrtong fellow is?

If his predictions are so great, he must be worth quadrillions by now, right?

And, why not just give his information for free, why charge for newsletters, semiars, etc, and help out other people become as successful as he has become?

 

Wed, 04/15/2015 - 15:42 | 5996048 CarpetShag
CarpetShag's picture

The guy is a jerk, period.

Wed, 04/15/2015 - 18:52 | 5996773 nailgunnin4you
nailgunnin4you's picture

Armstrong has been saying it is months away for years now.

Wed, 04/15/2015 - 15:15 | 5995928 Exit through th...
Exit through the gift store's picture

Worse since Douchebank tm.

 

Wed, 04/15/2015 - 15:15 | 5995932 DetectiveStern
DetectiveStern's picture

2018 is a bit ambitious .

Wed, 04/15/2015 - 15:51 | 5996081 Berspankme
Berspankme's picture

I didn't think we'd make it this far but no way can I see this lasting 3 more yrs

Wed, 04/15/2015 - 15:15 | 5995936 kaiserhoff
kaiserhoff's picture

There will be banks in 2018, but hopefully, none of these banks.

Wed, 04/15/2015 - 15:45 | 5996060 813kml
813kml's picture

I'm guessing mostly food banks.

Wed, 04/15/2015 - 15:15 | 5995937 FreeShitter
FreeShitter's picture

QE till WWIII

Wed, 04/15/2015 - 15:20 | 5995954 Jack Burton
Jack Burton's picture

Brilliant! +1,000

Wed, 04/15/2015 - 16:03 | 5996133 Kirk2NCC1701
Kirk2NCC1701's picture

QE till the Overlords present themselves. 

Then it'll be Childhood's End.

Wed, 04/15/2015 - 15:17 | 5995944 Weaponized Innocense
Weaponized Innocense's picture

Like the politically weaponized economy can't pretend all terror away so those who dare to short bullshit can't profit by being real by the torture one deserves being long indexes filled to the brim with bubbly deliciousness!

Wed, 04/15/2015 - 15:18 | 5995945 fascismlover
fascismlover's picture

As in all previous matters...perfect for the banks and wrinkly elites

Wed, 04/15/2015 - 15:18 | 5995948 mpath
mpath's picture

Does anybody really know exactly WHEN the perfect storm is coming? If you are just trying to be the person that says I told you so-that's one thing and they will definitely be right--question is when? If you are trying to make money in the stock market-then worrying about that stuff is a losing game. There are too many huge swings up/down to worry about the big picture. 

I have been follwing Woody Dorsey for almost 2 years now-and I will say this--if you want to make money with swing trades--nobody is better than him-period. See for yourself--sentiment timing

Wed, 04/15/2015 - 15:32 | 5995992 adr
adr's picture

Last year I didn't have any gut feeling, it just all felt empty. After the year was over I knew why. Nothing really happened last year. The stock market went up but real business went nowhere. Because business went nowhere there isn't any money to fund operations this year. With no quality collateral like open orders, banks aren't lending.

Now I am having an intense gut feeling of impending dread. Kind of like what I felt in 2007. Like then I can see everything in the support chain of commerce collapsing. I see businesses closing and stores in high end locales shutting their doors. Store employees seem exceptionally useless, like they are just going through the motions.

Major corporations are having massive problems and the accounting tricks are getting bolder. The shell game has been running so long that everybody knows the magician has palmed the ball.

Wed, 04/15/2015 - 15:53 | 5996087 Tinky
Tinky's picture

Agreed. Palpably different.

Holding together until 2018? Good luck with that.

Wed, 04/15/2015 - 19:06 | 5996845 nailgunnin4you
nailgunnin4you's picture

I have been follwing Woody Dorsey for almost 2 years now-and I will say this--if you want to make money with swing trades--nobody is better than him-period. See for yourself--sentiment timing

 

He's winning a rigged game, luck not skill.

Wed, 04/15/2015 - 15:19 | 5995952 Jack Burton
Jack Burton's picture

I am quickly, just like Russia, working to advance my gold holdings. I see gold as an absolute must have in the next 5 years ahead. No, I am no Goldbug, but I do now see it as a hedge against Fiat Insanity. Fiat is out of control, central banks are out of control, the wealth transfer via fiscal policy from the 99% up to the 1% is out of control.

Some gold, even a few thousand dollars worth at todays prices, will be usefull in the year 2018! You will wish to god you had some when this shirt storm breaks out.

Wed, 04/15/2015 - 15:34 | 5996006 wendigo
wendigo's picture

I hope you're wrong, because I plowed most of my savings into silver. Figured it was better to have lots of small change than a couple big bills, so to speak. Guess there's only one way to find out. 

Wed, 04/15/2015 - 15:39 | 5996035 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

The problem with silver is that it will be harder to get out of the country with it (as is my intention if shit goes south)

Wed, 04/15/2015 - 15:43 | 5996051 moonman
moonman's picture

When the shit goes south it will be the first time in American history that our borders are impenetrable.

NOBODY gets out

Wed, 04/15/2015 - 15:48 | 5996071 813kml
813kml's picture

Roach Motel

Wed, 04/15/2015 - 16:09 | 5996160 Sweet Chicken
Sweet Chicken's picture

Impossible, our borders are too damn vast to properly control. 

Wed, 04/15/2015 - 19:44 | 5996936 Macon Richardson
Macon Richardson's picture

Where would you to through our "damned vast" borders, Canada? Good luck with that; if you're in Canada you're in the USA. Mexico? Think you got the cojones to have some coyote take you south? You with your sack of silver or bag of gold? Maybe a speedboat across the Baring Straight to mother Russia? The lockdown is geographic.

Wed, 04/15/2015 - 17:27 | 5996236 Stormtrooper
Stormtrooper's picture

Simple.

Just balance the load in your battle vest by putting your bags of silver bullion on one side and your bags of ammo on the other side.  As you use up the ammo getting out of the country, move silver bullion over to rebalance.

Wed, 04/15/2015 - 15:23 | 5995960 yogibear
yogibear's picture

Douche Bank blowing more hot air.

As the Central Banks's Messiah said:

 “The market can stay irrational longer than you can stay solvent.” 

- John Maynard Keynes

Wed, 04/15/2015 - 15:25 | 5995966 XqWretch
XqWretch's picture

"a perfect default storm could be created for 2018 if the Fed raises rates in 2015."

Soooooo raise rates later? I am sure that will make a difference!

Wed, 04/15/2015 - 15:31 | 5995983 barry2001
barry2001's picture

If you are interested in drones check out this site : http://pickyourdrone.com/

Wed, 04/15/2015 - 15:35 | 5996015 BoPeople
BoPeople's picture

"Is it too much to ask for drones with fricken laser beams mounted on their ..."?

Wed, 04/15/2015 - 15:34 | 5996003 BoPeople
BoPeople's picture

Oh, good its buy, buy, buy until 2018. DB says so.

Wed, 04/15/2015 - 15:35 | 5996010 SillyWabbits
SillyWabbits's picture

Here is all you need to know.

The “Perfect Storm” will hit at exactly the right time

For all the right reasons:

And do precisely the correct amount of damage.

Wed, 04/15/2015 - 15:36 | 5996019 SheepDog-One
SheepDog-One's picture

But remain 0% 4eva, and no problems! Come on.....we've gone so far past full-retard there's no going back ever.

Wed, 04/15/2015 - 15:41 | 5996040 SheepDog-One
SheepDog-One's picture

None of these fucktards predicted 'Lehman'.....hell they can't even predict any data within 40% accuracy most of the time, so who gives a crap about what Douchebag Bank says in panic over raising rates, which we know the Fed has absolutely no intention of actually doing anyway? Fuck off and die, bailed out banksters!

Wed, 04/15/2015 - 15:46 | 5996059 falak pema
falak pema's picture

When the chief HF and TBTF scion of Rhenan capitalism admits its model, as it hurtles thru the tunnel of currency wars on the fiat print runaway toboggan, as guardian of world financial network status quo,  is now showing the cracks of Humpty Dumpty. 

You can't fool all the people all the time ! 

Hank Paulson, Timmy and Ben B did it once... but to repeat it...hmmmm !

Wed, 04/15/2015 - 15:51 | 5996082 wmbz
wmbz's picture

"a perfect default storm could be created for 2018 if the Fed raises rates in 2015."


What a pant load! Come up with some new scare tactics douchebag! 

If and that a giant 'if' the un-fed raised rates by a lousy quarter point and w. street wizzed it's pants for a second, it would be straight back to zero or below.

These motherfuckers are all heading in the same direction...

Wed, 04/15/2015 - 16:07 | 5996155 venturen
venturen's picture

The biggest worrry...is if the economy does take off...then this effen house of cards will collaspe.... Now they can keep pretending and cheating with the FED giving them the wild cards

Wed, 04/15/2015 - 16:13 | 5996157 SilverFish
SilverFish's picture

Back in 2010 they said 2012

 

Back in 2012 they said 2014

 

End of 2014 they said 2015 or 2016

 

Now it's 2018

 

GTFOutaa here with this nonsense, Douchebank. Let me know when it's 6 monts out. Until then, I have things to do.

Wed, 04/15/2015 - 16:21 | 5996209 Meremortal
Meremortal's picture

That's all right, most of ZeroHedge has been calling the Great Crash imminent for 7 years.

Wed, 04/15/2015 - 20:56 | 5997102 petkovplamen
petkovplamen's picture

actually if you ever bothered to chart US recessions you would have noticed they are now happening exactly at 7 years interval. So yes, USA is due for one n 2015 and I bet if US gov ever released unfudged economic data then you will see US is already in recession.

Wed, 04/15/2015 - 17:08 | 5996371 SweetDoug
SweetDoug's picture

'

'

'

Your name is gross. Your avatar is gross.

 

But you're commments are dead on.

 

They're neva raising rates.

 

•?•
V-V

Wed, 04/15/2015 - 16:12 | 5996175 taketheredpill
taketheredpill's picture

I'm buying as many houses in Spain as I can for my family and friends.  By 2018 the banks will have paid off my mortgage.

 

Wed, 04/15/2015 - 16:44 | 5996294 debunker
debunker's picture

can you share any pertinent RE links?

Wed, 04/15/2015 - 16:21 | 5996211 stant
stant's picture

Ha ha I was two yrs early with Lehman , they are two yrs late this time

Wed, 04/15/2015 - 16:52 | 5996322 seek
seek's picture

2018 has been my go-to year for a while. I look it as a probability distribution curve, it starts out with a low probability in 2015 and starts climbing (typical S-curve) in 2016 with the steep part hitting 2017.

I have little doubt the the financial landscape and world economy will barely resemble today's four years from now. There's too many plates spinning and too many things past the point of no return. That said, those saying it's happening by the end of the year, never underestimate TPTB's ability to push things out one or two more quarters. They're pros at the delay tactics.

Looking at the leading indicators, though, it sure looks like a 2008-level shitstorm is hitting the world even as I type this.

Wed, 04/15/2015 - 17:01 | 5996350 Tenacious_Z
Tenacious_Z's picture

Hi all, long time lurker - first time poster. What I'm wondering about rates is that with liquidity in FI markets universally acknowledged as awful and many bonds now trading at negative YTM how can the Fed (or others) even contemplate raising rates unless it was telegraphed for almost a year? Anything else would seem sure to trigger a massive collapse as negative YTM bonds become even more worthless and people face trying to sell in an illiquid market at the same time? Any thoughts?

Wed, 04/15/2015 - 17:10 | 5996380 gcjohns1971
gcjohns1971's picture

DB is, as predicted, screaming.

DB is one of the owners of the Federal Reserve Banks.

There are signs these banks are not unified in their policy thinking.

If I were a betting man, I'd be that TPTB are going to crush DB, and allow a conflagaration to consume Western Europe, the US, and the Western Banking system in general, because they've moved their assets to China.   They will subsequently re-enter the fray on the back of a new hegemon and re-establish their control over the financial chaos of the world through the IMF.

But frankly, I don't have the kind of money needed to make those kinds of bets payoff.

Wed, 04/15/2015 - 19:12 | 5996867 Runs-With_Toast
Runs-With_Toast's picture

My go to year is 2017 as they react to the approching 2018 storm

Wed, 04/15/2015 - 21:03 | 5997134 Omega_Man
Omega_Man's picture

silver bars 100oz strapped on should stop bullets

Wed, 04/15/2015 - 21:06 | 5997142 Omega_Man
Omega_Man's picture

ZH trollers should be able to borrow at 0%

Thu, 04/16/2015 - 02:27 | 5997852 bid the soldier...
bid the soldiers shoot's picture

 

Apres moi, le Perfect Storm, dude

Thu, 04/16/2015 - 02:28 | 5997854 rockface
rockface's picture

What are these "current artificial conditions"? Are they referring to Marxism and central planning?

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