While even the mainstream media is now aware of the 'turn' in the credit cycle and the decoupling of high-yield credit markets from equity (and equity protection) markets, there is a lot going on under the surface of the broad lending (and borrowing) markets that warrants serious concern.
As The National Association of Credit Managers notes, [6]
So much for that hoped for pattern of one bad month followed by a good one. This month’s CMI is as low as it has been in more than a year and this time the problem is in the non-favorable categories—a bigger concern than if the favorable had been the issue. When the unfavorable factors are showing stress, it is an indication that companies are feeling the pinch and may be starting a long downward trend.
There was considerable distress noted in the unfavorable factors as well. These are the factors that usually suggest that creditors are getting in trouble. For the last several months, the good news has been that current credit was in decent shape, that the economic issues of the day had yet to really impact, but this no longer seems to be the case. The distress is showing up.
[7]
Now we have a month when almost all the categories have weakened.
This is signaling an abundance of caution going into what is supposed to be strong selling season and this is worrying.
It would seem that many of the triggers that usually promote growth are not working out - unemployment is relatively low, there is no inflation in the energy sector and there has been improvement in the housing data - nothing seems to be able to shake the lethargy and concern.
More problematic still is the resurgence in the bankrutpcy index..
In addition, the 'amount of credit extended' index has tumbled to its lowest since October 2010, the same level it had dropped to before the collapse began in 2008.
Comparing September 2015 to September 2014, thus far, the trend is far from a happy one. Nearly all the readings are down from where they were a month ago and significantly down from a year ago. There will have to be a big rebound just to get back to where the readings were in October and November of 2014.
* * *
And finally, it is not just high-yield credit markets that are decoupled, the investment-grade bond market's cost of hedging is now seriously decoupled from the equity market's costs of hedging...
[8]
With leverage at or near recod highs and downgrades-to-upgrade ratios at 2009 peaks, even with the help of additional QE around the world, the rise in default rates will force credit to contract and disable the only leg holding stocks up - the non-economic stock repurchaser.
[9]
Charts: Bloomberg
