Plunging credit quality more troubling than market rout


The Dow plunged 1175 points (-4.6%) overnight. 4.6% is a lot and yes 4-digit drops optically look worse but off the higher base we get higher (record) point drops. One thing to contemplate in a rising bond yield market is corporate credit quality. Since 2006 the average credit ratings for US corporates issued by the big agencies have seen the number of top rated (to the left) fall while those with deteriorating grades (to the right) soar. That’s right, the 4 categories before “junk” have risen sharply. After many years of virtually free money many corporations have let the waistline grow. When refinancing comes around just how will credit ratings influence the new spreads of corporates who’ve shifted to the right?

The IMF highlighted in 2017  that US companies have added $7.8t in debt & other liabilities since 2010. The ability to cover interest payments is now at the weakest level since 2008 crisis.

This despite near full employment, record level equity markets and every other word of encouragement from our politicians.

However if this is the state of the corporate sector at arguably the sweet spot of the economic cycle CM shudders to think the state of potential bankruptcies that will come when the cycle truly takes a turn for the worse. This is a very bad sign.

“Nothing to see here…nothing to see here…”

Banco DB

Deutsche Bank, Germany’s largest bank continues to post all time low share price. To give an idea on its size, it is around 40% of National Australia Bank. When Europe’s financial powerhouse is down on its knees you have to wonder about whether such fears are indeed warranted and if not what is behind the weakness. Deutsche Bank’s Chairman has just said “Brexit would be a disaster for the UK” . Actually Mr Chairman Brexit would be a disaster for you.

I discussed yesterday that we had seen the forced bailout of Belgium’s Optima Bank. Not only that Banco Populare in Spain had been given E2.5bn to shore up its liquidity.

Banco Popu

We also mentioned several weeks ago that the ECB had been breaking its own charter by bailing out insolvent Italian bank debt, including the 540 year old BMPDS.

Banco BMPS

Tomorrow I publish a 30 page report on why I think this could be much worse than GFC1. Things are so much worse than the authorities want you to believe. Don’t forget we have been in the worst period of credit, currency and equity market manipulation in history.

The wisest investment is to ignore the professionals


The sell-side is littered with highly paid experts that present us with rational explanations for their bullishness. However it is actually their lack of bearishness that is the problem. Looking over history the ratio of their sell recommendations on company research is highly inversely correlated with market movement. In the chart above we can see how far off the mark brokers are. When sell recommendations decline to all time lows, the market  tanks. Think back to 2008. We are now seeing the same ratio of low sell recommendations  we did just before Lehman went bust. The market is set to tank again. Maybe Brexit becomes a catalyst but it is not the cause.

Goes to show you that the brokers are worth keeping. It is only in that they stay consistently wrong that we can invest wisely. Keep up the good work.

It’s official – the Fed’s Yellen has lost the war on monetary policy


One of the most terrible aftermaths of the Global Financial Crisis (GFC) is that financial services companies have had to make serious dents into staff numbers to cut costs. Now for all of the ‘bankster’ arguments that have been made, the GFC has also meant decently paid but intelligent workers have been replaced with green graduates with no history or understanding of cycles. So as a result we are getting more misunderstandings.

These intern-esque kind of knowledge bank stood out because markets became happy that Ms Yellen is unlikely to raise rates because the US economy is sicker than people thought. You don’t say? See PMI and US non farm payrolls.

I might cynically say that the rate rise in December to 0.37% by the Fed was a headfake. It was trying to bluff markets into believing that the underlying economy was stronger than it really was. Isn’t it striking that employment has fallen off a cliff and PMI is a deflated balloon since. So for such a measly rise in rates to make out ‘inflation was coming down the pipe’ you might ask yourself is the economy so sensitive to punt change?

This is the argument I continue to make. Central banks have lost not only the battle but the war on monetary policy. They have spent all their ammo. For markets to cheer today at Yellen not raising rates from ‘stuff all’ to ‘peanuts’ should be a massive red flag. It is a perfect example of how dumbed down market participants have become. This is called believing one’s own bullshit.  Had Yellen raised rates markets should have cheered because of what that would have said something more concrete about real underlying strength.if she cut rates that would have spooked markets more. Standing pat was the only option.

Look at the ECB. Markit showed Eurozone manufacturing activity hit a 3-mth low. The Chief Economist of Markit wrote, “New orders grew at the slowest rate for over a year as demand showed signs of waning both within the euro area and further afield. Not surprisingly, companies remain reluctant to build capacity and take on extra workers, lacking signs of any imminent upturn in demand…France and Greece remain the key areas of concern, both seeing manufacturing contracting again in May. Worryingly, however, growth has also slowed sharply in previously fast-growing countries such as Spain, Italy and Ireland, meaning there are now no signs of robust manufacturing growth evident across the regionThe overall slowing of manufacturing activity confounds expectations that recoveries will accelerate on the back of the ECB stimulus announced earlier in the year.Hopes remain pinned on forthcoming corporate bond purchases and new tranches of ultra-cheap bank loans from the ECB providing an extra boost in coming months.” Ireland hit a 34 month low followed by Spain at a 7-mth low.

So market participants need to wake up to realities here. Yellen’s remarks to me are yet more confirmation to remain very bearish. To mask it in words like the “Fed is in no rush” is not so much to do with fine tuned Fed planning but sheer fear. If you look closely you should be able to see the whites of their eyes. This is the prelude to panic stations. Don’t forget money velocity continues to slow!


So that is why under-performing assets like Gold are really the more sensible safe haven!


Before I forget Europe is even worse…on velocity…almost 5 euro needed to create 1 euro of GDP.