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Corporate Credit Crashing: Waiting On The Rest Of The Herd
Submitted by Jeffrey Snider via Alhambra Investment Partners,
With almost everything turning lower this week under “dollar” pressure, it is imperative to keep in mind the apex asset class. In 2007, it was the ABX indices and various mortgage related structures that signified the how far along everything was; in this cycle it is clearly corporate credit. The disarray starts in the riskiest pieces and then moves inward and eventually, if left unchecked, eroding too much underneath with which to support what was once believed perfectly safe. Once there is no place to hide, the turn really begins.
Leveraged loan pricing, among the riskiest of the corporate bubble, had been somewhat tame, even unexpectedly so, as commodities ran aground under the weight of global “dollar” funding.
In the past few days, however, leveraged loans (at least what is visible and represented by the index; it is very likely that less liquid issues are faring far more poorly) have been sold as have junk bonds. The market value portion of the S&P/LSTA US Leveraged Loan 100 fell 5 points just in the past two days, all the way to 965.
Both junk bonds and leveraged loans are back down to prices far too close to the nadir of the last selloff in mid-December. That would seem to suggest, as UST’s (and the fast again flattening UST curve), that the broad credit and funding environment has turned far more toward that which prevailed in early December than the more benign mid-March to early May “pause.”
Undoubtedly, there are economic concerns playing a significant part of the selloff but it may be liquidity that is the proximate catalyst (which is just another expression of those economic concerns combined with perceptions about the Fed’s proclivity to make it worse).
The combined trend in liquidity and the apparently persistent impulse toward selling is a dangerous combination, as systemic capacity is extremely poor and the incongruence of corporate pricing to actual, non-QE delivered risk is as extreme. The divergence between this heightened form of “reach for yield” and what bearishness that beset the treasury market is beyond remarkable, as if there was open bifurcation in overall credit back in 2013. Dating to right around November 20 that year, all bonds were bid but for very different reasons.
Corporate spreads, especially junk, compressed until the middle of last year – what a difference two years makes, as the corporate bubble is belatedly catching the warning of UST trading.
The rising “dollar” has meant rising spreads, as the junk “curve” has actually retraced the entire taper euphoria. That is certainly a measure of the ongoing systemic reset for risk perceptions, but in the wider context there is perhaps a long way yet to go.
In absolute terms, this move under the “dollar” is almost as severe as that in the middle of 2011...
which triggered the renewed eurodollar decay and eventually two new QE’s: in 2011, this measure of risk spreads jumped 90 bps from February 2011 until the end of that September and the Fed’s renewed “dollar” swaps. The current decompression is already 74 bps dating back to July 2014.
Again, it is the combination of liquidity (restrained and getting worse) and constant selling that ends up taking the next step.
The real danger is if this continues past some unknown critical mass the entire herd will turn and there won’t be much at that point to offer support – the dealers are already out as are banks more generally.
As a reminder, the size of the “herd” really escapes imagination:
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Thin the fucking herd already.
no shit....I'm runnin' outa popcorn watchin' this shitshow
There is an important point to be made about debt. Recall, debt is productive if it is used to build a productive enterprise. Debt can actually pay itself off in this manner, by producing excess wealth. So when the debt of actual producers is crashing, not just the debt of casino "systemically important" banks, you know you are fucked.
Possession quickly becomes 100% of the law. In this case, possession of productive capacity and the resources to produce. All the paper shit is irrelevant at that point. Again, thin the fucking herd.
Does this mean Anne Margaret's NOT coming?
Was thinking about buying a new car, but my 10 year old Lincoln is paid off and still running... Maybe I will wait until the collapse and buy a 750il with a sleeve of silver eagles.
I got a 2008 Toyota with 155K miles and still runs like new. The old woman keeps wanting to get a loan to buy a new car. I said hell no. I'm sick of living in debt
Car engines are good for 300 to 400k if maintained. The old killer rust has been conquered, diesel engines run forever.
We're now squarely in the "cracks turning into fissures" stage.
Liquifaction, anyone?
again, don't worry, fidelity will buy them. they love shit sammies.
Don't worry. Treasury, FED, Administration and Congress will bail em all out. They will HAVE to. Some new alphabet agency funded to the tune of 2 plus Trillion will exist by summer of 2016. Fer sure. And the money will come from? The Fed of course - like in 2008 money magically appeared to bail out AIG, Lehman, etc.
A sham? Bet ter ass. Cause the only REAL way to solve the fucking mess the CBs have created is to let the MoFo melt down. All else just kicks cans and that IS what QE, ZIRP, NIRP, etc, etc, etc has been all about.
And doan forget to just BTFD! Of Short side assets. If there is a bounce early next week, let it run a bit and just BTFD!
BTW - I agree with popcorn comment - I am about out myself.
Don't worry. Treasury, FED, Administration and Congress will bail em all out. - with taxpayer money (fixed it for yah)..
What taxpayer money? There's none left. Maybe future taxpayer money.
Bank account seizures will follow after they have full control of their fiat it will be worthless..
From the awesome Jim Grant (h/t previous ZH posting):
[4:30] The only thing that is dynamic in the world of Money and Credit is the issuance of more and more dubiously sourced debt at more and more lenient terms. What debt does is two things: It pulls forward consumption, and it pushes back the evidence, or the recognition of business failure. So you have a backlog of companies that WILL go bankrupt because they have been strung along by easy credit. And in the present you have consumption that will not be taking place in the future because of the ease of borrowing.
https://www.youtube.com/watch?v=42wGni0uRe4
and original ZH posting:
http://www.zerohedge.com/news/2015-07-24/jim-grant-gold-mr-market-having...
Jeffrey Snider, I am very glad to see one of your articles on the Hedge. You are one of the best.
<<The rising “dollar” has meant rising spreads, as the junk “curve” has actually retraced the entire taper euphoria. That is certainly a measure of the ongoing systemic reset for risk perceptions, but in the wider context there is perhaps a long way yet to go. In absolute terms, this move under the “dollar” is almost as severe as that in the middle of 2011... >>
I am NO economist, and don't know much about money. But the rising USD has set off an alarm for me, as the country where I live (Canada) is one of its satellite currencies. The Loonie has been falling like a rock all year, although it has not fallen the worst. But nearly all currencies now have fallen against the USD. This does not mean the US economy is healthy, but rather in that idiotic newspeak, the "cleanest dirty shirt" - all these fiat currencies are dirty, and the USD is rising simply because its satellites are dying faster.
But your article isn't about currencies, but about HYC. The risk of HYC seems to be overwhelming its 'reach for yield' benefits. Although the central banks have treated this crisis as a liquidity crisis, it is actually a solvency crisis, and now that even liquidity is drying up, what further can a central bank do? It cannot create solvency, and since liquidity is its entire toolbox, it will have to make this look somehow as though more liquidity is the answer. In 2011, faith in central banks was still strong and we were under the steam of QE2 (quickly followed by QE3 in 2012). In 2011, QE2 allowed central bankers to avoid tightening, when sharp increases in commodity prices drove headline inflation rates higher for awhile.
But today, although official 'inflation' is low, official unemployment is not a problem, and the stock markets are still near all-time highs, yet the public has little faith in the relevance of central banks. Central bankers can restore that faith (if at all) ONLY by some real tightening (i.e., some form of official interest rate rise, even if only 25 bps). The Fed has even 'leaked' a recent heads-up to this effect. We all know what a tightening policy will do in this economy, which is dependent on ZIRP. But there will can no QE4 unless some urgency is seen, and it will take something drastic to disturb the complacency of the market. I think both HYC and the rising dollar, in the face of NO tightening policy to date (the tapering effect on loose credit now gone, as your report shows), will essentially force the Fed to do something drastic to show some sort of relevance. They need another 'taper euphoria', and the only way they can get that is to raise rates, even if the economy cannot afford to. Then they could lower them again, and perhaps be seen as riding to the rescue, and justify QE4 that way.
I think that 'they' (central banks) have accepted that some form of crisis is due. I think 'they' would rather be in control of that crisis (as in 2008), than have it take them by surprise. If a panic of some sort happens this autumn, it will be the best telegraphed and most anticipated panic in the last two centuries. I think that since 'they' seem to be doing their best to telegraph it, that 'they' may cause it simply for that reason, as some sort of evidence that 'they' still have relevance, are still 'in control', and that we the hapless population should continue to trust them.
+ 100 - great post!
Renfield, that is the clearest explanation of the issue. It is world-wide. The entire system is insolvent. The question is clear: how does it get rinsed out this time?
Aenema.
Learn to swim.
Yes, but allow me to clarify. How do you know that "they" (central banks) are in control? We all know they only control one thing, the Federal Reserve Note. They are in control so much as people of the world actually use this note as a mechanism for trade, period. The trend in the use of the FRN is pretty fucking clear to me.
Hillary Clinton Exposed, Movie She Banned From Theaters Full Movie
https://www.youtube.com/watch?v=1mYW5nmS9ps
+1 this was really good. i imagine it could apply to all of government and candidates and so on. As Mark Levin pointed out near the end, the election ought to be about Liberty and in particular economic liberty which implies limited constitutional government. It is in this context that one's decision to elect ought to be made. Though I also think its too little too late.
A lound ring of a very large bell in the night.
This stuff is a little frightening
Sure...lets lend money to the CEOs so they can buy their stock back, kick in their stock options, and then disappear into
the woodwork of Cape Cod or Aspen CO. Lock in that historical low rate of return...and set these guys up...all at the hand of the
FEDERAL RESERVE.
TED spread is rising but not jumping. So funding is not (yet) a problem. Corporate spreads are rising to reflect a weaker profit envirionment and a more cautious end investor. Next stop? Fewer buybacks and leveraged take-overs. Not the end of the world, but stocks may struggle. The most worrying chart is the last one - if conditions continue to deteriorate there is a lot of "dry timber" to fuel a fire sale.