June 19, 2018

Comcast, AT&T Set To Become World's Most Indebted Companies With Over $350BN In Debt

At a time when the IMF estimates that more than 20% of the world's companies would be unable to cover their interest payments if interest rates moved sharply higher, Comcast and AT&T are poised to become the most indebted companies in the world following media megadeals that leave the two companies with little room to maneuver if profits fail to materialize, according to the Wall Street Journal.

As WSJ points out, assuming both are finalized, the deals would leave the two companies with a combined $350 billion in bonds and loans, more than one-third of a trillion dollars in debt. The number is making some bond fund managers nervous, and some are saying they won't include Comcast or AT&T debt in their portfolios - unless they bear a suitably high yield.

"It’s a very big number," said Mike Collins, a bond fund manager at PGIM Fixed Income, which manages $329 billion of corporate debt investments. "It has fixed-income investors a little nervous and rightfully so."

But rather than looking at these deals as isolated examples, WSJ reminds us that companies only arrived at this level of corporate indebtedness following a decadelong surge in corporate borrowing, as companies - including these two telecoms giants - eagerly bought back their shares to appease investors, and financed these purchases with debt. Global corporate debt, excluding financial institutions, now stands at $11 trillion. Meanwhile, the median leverage for companies with an investment grade rating has increased by 30% since the financial crisis.

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June 18, 2018

Deutsche: "This Is The Most Dangerous Development The Fed Wants To Avoid"

In the first week of February, in the trading session just before the February 5 VIX termination, the market tumbled as a result of a January average hourly earnings number that surged (even though as we explained at the time, the market had wildly misinterpreted the print), prompting speculation that the Fed was dangerously behind the curve and would need to accelerate its tightening, potentially hiking rates more than just 4 times in 2018, leading to an accelerating liquidation of risk assets which eventually culminated in the record VIX spike.

Since then, inflation fears moderated following several downward revisions (as expected) and more tame hourly earnings prints, with market concerns instead shifting to trader wars, the return of populism to Europe, the tech bubble, and the sustainability of record margins and net income.

But according to a recent analysis by Deutsche Bank's Aleksandar Kocic, traders are ignoring the risk of an imminent, "phase shift" spike in wages at their own risk. Specifically, Kocic looks at the current locus of the Philips curve - which many economists have left for dead due to its seeming failure to explain how the plunge in unemployment to record low levels has failed to boost wages - and notes that as the economy approaches the full employment, "wages tend to become more responsive." This, to the Deutsche Bank analyst, "is the inflection point that the Fed is monitoring."

Looking at the Phillips curve over the past 4 economic cycles, Kocic compares it to the Cheshire cat's smile from Alice in Wonderland, which is present even when the actual cat body is no longer there: "In each cycle, it falls apart, but after every annihilation, it re-composes itself and continues to play an important role."

Specifically, what Kocic highlights, is the sudden phase transitions between the end of one cycle and the start of another, in which one observes a "near vertical" spike in inflation to the smallest favorable change in underlying conditions. In the DB chart below, each cycle has a different color which implicitly marks their beginning and end.

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June 15, 2018

The Fed Is "Living Dangerously" - The Great Financial Crisis "Will Be Eclipsed"

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019. The chart tells us the Fed is already living dangerously with yesterday’s hike, and further rises will all but guarantee a credit crisis.

The reason successive interest rate peaks have been on a declining trend is bound up in the rising level of outstanding debt and loans, shown by the red line on the chart. Besides a temporary slowdown during the last credit crisis, debt has been increasing over every cycle. Instead of sequential credit crises eliminating malinvestments, it is clear the Fed has prevented debt liquidation for at least the last forty years. The accumulation of debt since the 1980s is behind the reason for the decline in interest rate peaks over time.

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June 14, 2018

ECB Preview: The Beginning Of The End Of QE?

With the surprisingly hawkish Fed out of the way, there's only the ECB left to round out this week's relentless barrage of news and events (the BOJ will be a big snooze). So, courtesy of RanSquawk, here is what to expect from Mario Draghi when he takes the microphone in Latvia (an odd place, considering the country's own central banker Ilmars Rimsevics has been barred over corruption charges) tomorrow at 8:30am when he may unveil the end of Europe's QE.

  • Unanimous expectations for the ECB to leave its three key rates unchanged
  • Will the ECB unveil its blueprint for winding down the PSPP or will they again ‘kick the can down the road’ to July?
  • Questions likely to be raised on the Bank’s view surrounding the latest developments in Italian politics
  • Macro projections likely to see oil prices curtail 2018 growth expectations whilst lifting inflation prospects

PREVIOUS MEETING: The Bank left their opening statement unchanged in what was a meeting ultimately void of fireworks with Draghi intent on fending off most questions from journalists by stating that the Bank did not discuss FX volatility, their June roadmap, monetary policy ‘per se’ or rising yields. On the economic front, Draghi stated that inflation remain subdued and is yet to show signs of an upward trend, whilst incoming data since the March meeting shows a moderation of growth.

ECB MINUTES: Markets were relatively unreactive to the latest ECB minutes which made little mention of discussions on the future path of monetary policy and instead focused on current economic performance. The account highlighted the views that the more pronounced weakening of demand cannot be ruled out, suggestions that the ECB was close to a sustained adjustment of inflation but most disagreed and that uncertainty over the outlook had increased.

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June 13, 2018

"No One's Ready For The ECB" - The Eurozone's Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

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June 12, 2018

War On Cryptocurrencies: Wells Fargo, J.P. Morgan Chase, Bank of America, Citigroup And Capital One Have Banned Their Customers From Buying Bitcoin With Credit Cards

A war on cryptocurrencies such as Bitcoin, Ethereum, Ripple and Litecoin has begun, and it threatens to destroy the entire cryptocurrency industry.  If you think that I am exaggerating, just keep reading.  Government agencies are cracking down hard, Bitcoin traders that don’t file the proper paperwork are being sent to prison, Facebook and other online ad platforms have banned all cryptocurrency advertising, and now major credit card companies are banning their customers from using their credit cards to buy cryptos.  What is an industry supposed to do if it can’t advertise and it can’t take credit cards?  Such moves would kill virtually any consumer-oriented industry, and right now the cryptocurrency industry is absolutely reeling.  If this war on cryptocurrencies continues to intensify, I honestly don’t know how the industry is going to survive.

On Monday, another shot was fired in the war.  Wells Fargo formally announced that their customers would no longer be permitted to purchase Bitcoin and other cryptocurrencies with Wells Fargo credit cards

Wells Fargo customers can no longer buy cryptocurrencies such as bitcoin on their credit cards, the company announced Monday. But they can still buy firearms.

The San Francisco-based bank joined some of its Wall Street peers in banning the purchase of cryptocurrencies on credit cards and said its decision is “in line with the overall industry.”

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June 11, 2018

Morgan Stanley Is Wrong: Goldman Warns China's Credit Impulse Collapse Will "Drag On Growth" This Year

Just over a month ago - in what seemed to be an effort to keep the dream of a global synchronous recovery narrative alive - Morgan Stanley attempted to show that the link between China's (declining) credit impulse and the global economy (which we are constantly told is ebullient) has now been severed and all is well in the world.

Their Chief Asia Economist Chetan Ahya began by confirming that "if you had been able to reliably pick the key global macro variable over 2012-16, China’s credit impulse would have been your choice" and explains why (this should be obvious to regular readers): 

The incredibly tight link between the credit impulse and China’s growth cycle, emerging markets (EMs) exports, global growth and commodity prices meant that it would have accurately predicted the direction of almost all other global macro variables that mattered, with about six months’ lead time.

He further explains the "simple" - in retrospect of course - reason behind this observation:

China’s credit impulse – or its leverage cycle – was the only game in town back then. With global aggregate demand weak as developed markets (DMs) were deleveraging and EMs were adjusting, the change in China’s credit impulse was the most significant driver of the global economy

However, in a striking claim which breaks with precedent and which, if correct suggests a historic change in the relationship between China's credit creation and its impact on global markets and economies, the Morgan Stanley economist then writes that the link between China's credit impulse and the global economy "has now been broken" and justifies his answer as follows: 

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June 8, 2018

Argentina Bailed Out With Biggest Ever Loan In IMF History

Just a few weeks after Argentina became ground zero for the coming Emerging Market crisis, when its currency suddenly collapsed at the end of April amid soaring inflation, exploding capital outflows and a central bank that was far behind the curve (as in "13% of rate hikes in a week" behind)...

... the IMF has officially bailed out the country - again - this time with a $50 billion, 36-month stand-by loan, and coming in about $10 billion more than rumored earlier in the week, it was the largest ever bailout loan in IMF history, meant to help restore investor confidence in a nation that, between its soaring external debt and current account deficit, prompted JPMorgan to suggest that along with Turkey, Argentina is in effect, doomed.

As the JPM chart below shows, the country’s total budget deficit, which includes interest payments on debt, was 6.5% of GDP last year, much of reflecting a debt binge of about $100 billion over the last two and a half years. The primary fiscal deficit in 2017 was 3.9%.

The loan will have a minimum interest rate of 1.96% rising as high as 4.96%.

“We are convinced that we’re on the right path, that we’ve avoided a crisis,” Finance Minister Nicolás Dujovne said at a press conference in Buenos Aires. “This is aimed at building a normal economy.”

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June 7, 2018

The Surprising Reason Why There Are Now More Job Openings Than Unemployed Workers

As we reported yesterday, for the first time in history, the number of job openings in the US (6.7MM) has surpassed the official number of unemployed workers (6.1MM).

And yet something about that number does not make sense.

When we reported on the jobs number back on June 1, we observed that the number of people not in the labor force has risen to nearly 96 million, and while much of this is due to demographics, and the America's "opioid" epidemic, a lot can be assigned to an increasingly inefficient labor market that lacks dynamism. Subsequent deep dives into the jobs number show us that the health of the job market may not be on a par with where it was back in 2006 , and that the job market "health" may be judging a book by its cover.

One such indicator to note is the amount of churn that occurs between jobs: churn is supposed to give an indication of how active participants in the workforce are in looking for better opportunities than the ones they currently have. In a market where there was recently more job openings than there were unemployed people to fill them, as was reported by the Wall Street Journal, one would expect churn to be at, or exceeding, levels it has previously been at during times of a "healthy" economy.

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June 6, 2018

China Offers $72 Billion MLF "To Ensure Banking Liquidity Remains Stable"

Just hours after we warned that it was time to start worrying about China's debt default avalanche, and shortly after the PBOC lowered its credit quality restrictions for collateral, China offered its Medium-term Lending Facility (MLF) to inject CNY463bn (~$72bn) of liquidity.

As we detailed earlier, the recent blow out in Chinese corporate bond spooked none other than the PBOC, which last last Friday announced that it will accept lower-rated corporate bonds as collateral for a major liquidity management tool in a move that analysts see as designed in part to restore confidence in the country's corporate bond market.

Specifically, the central bank said that it had decided to expand the collateral pool for the medium-term lending facility (MLF) to include corporate bonds rated AA+ or AA by domestic rating agencies.  The central bank also added as collateral financial bonds rated AA and above with proceeds to support rural development, small enterprises and green projects, as well as high-quality loans supporting green projects and small enterprises, the PBoC said in a statement posted on its website.

The PBoC said the expansion of collateral would "help alleviate the financing difficulties of small companies and to promote the healthy development of the corporate bond market."

CICC confirmed as much, writing in a note that "the expansion of collateral for MLF, to some extent, is intended to bolster confidence in lower-rated corporate bonds ... and to avoid creating an apparent net financing gap which would impact the real economy."

Translated: the PBOC is providing yet another backdoor bailout to China's latest and greatest distressed sector in hopes of avoiding an avalanche of defaults as credit conditions become increasingly tighter as the PBOC hikes tit for tat with the Fed.

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June 5, 2018

Central Banker Observes Sudden "Evaporation" Of Dollar Funding, Warns Of Global Turmoil

Last October, just as the Fed started shrinking its balance sheet, we published yet another article on what is arguably the biggest threat to not only risk assets, but also the global economy: "The Dollar Funding Shortage: It Never Went Away And It's Starting To Get Worse Again."

While hardly a novel problem, we first discussed the return of the dollar funding shortage in March 2015, the fact that global stocks kept rising, and that overall funding conditions remained relatively loose keeping the global economy well-lubricated, prevented said dollar funding shortage from becoming a major concern to policymakers, despite occasional recent hiccups such as the Libor-OIS spread blow out, which both we and Citi explained w as a symptom of the creeping shortage of the world's reserve currency.

Until now.

In an op-ed published overnight in the FT, a central banker writes that when it comes to the turmoil gripping the world's Emerging Markets, whether it is the acute, idiosyncratic version observed in Argentina and Turkey, which according to JPM may be doomed...

... or the more gradual selloffs observed in places like Indonesia, Malaysia, Brazil, Mexico and India, don't blame the Fed's rate hike cycle. Instead blame the "double whammy" of the Fed's shrinking balance sheet coupled with the dollar draining surge in debt issuance by the US Treasury.

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June 4, 2018

In The Global Trade War, America Has "All The Cards"

A Game of Cards

“From now on, we expect trading relationships to be fair and to be reciprocal,” announced President Trump, smiling, a slight blush. In his hand, a Royal Flush, his life history a gambler’s bluff.

“These tariffs are an affront to the longstanding security partnership between Canada and the US and to the thousands of Canadians who fought and died alongside their American brothers,” said young Justin Trudeau, announcing reciprocal tariffs, three Queens in his hand.  And Trump reflected on his early property developments, bluffing his way into the big game. “That was hard. This is not,” whispered The Donald.

“Mexico’s position regarding cooperation with the US on trade, migration or security will not vary because of offensive rhetoric or unilateral and unjustified measures of this kind,” said Foreign Minister Videgaray, a pair of Jacks.

“The US now leaves us with no choice but to proceed with a WTO dispute settlement case and the imposition of additional duties on a number of imports,” said EU Commission President Juncker, a Full House. But of course, the Europeans are hopeless at poker; 28 people cannot play a single hand, each attempt sparks endless argument.

“No leader on earth could play their way out of a hand with four bankruptcies. Stormy. Hollywood Access. The Paris Accord. North Korea. Or Iran’s nuclear deal,” thought Trump, enjoying the high roller table immensely.

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June 1, 2018

After Italy... Spain Risk Soars

Political risk in Europe was largely ignored in international markets because of the mirage of the so-called 'Macron effect', the ECB’s massive quantitative easing program, and a perception that everything was different this time in Europe added to the illusion of growth and stability.

However, a storm was brewing and the same old problems seen throughout the years in Europe were increasing.

In Italy, the shock came with an election that brought a coalition of extreme left and extreme right populists. Disillusion with the Euro was evident in Italy for years, as the economy continued to be in stagnation while debt soared. However, international bodies, mainstream analysts, and banks preferred to ignore the risk, instead continuing to announce impossible growth estimates for the following year and science-fiction banks’ profitability improvements.

Italy’s economic problems are self-inflicted, not due to the Euro. Governments of all ideologies have consistently promoted inefficient dinosaur “national champions” and state-owned semi-ministerial corporations at the expense of small and medium enterprises, competitiveness and growth, labor market rigidities created high unemployment, while banks were incentivized to lend to obsolete and indebted state-owned companies in their disastrous empire-building acquisitions, inefficient municipalities, as well as finance bloated local and national government spending. This led to the highest Non-Performing Loan figure in Europe.

Now, the new government wants to solve a problem of high government intervention with more government intervention. The measures outlined would imply an additional deficit of some €130bn by 2020 and shoot the 2020 Deficit/GDP to 8%, according to Fidentiis

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May 31, 2018

European Implosion Sends Panic Through Global Markets As George Soros Warns ‘We May Be Heading For Another Major Financial Crisis’

I told you to keep your eyes on Europe.  On Tuesday, widespread panic shot through European financial markets and this deeply affected U.S. markets as well.  The Dow Jones industrial average fell 391 points, and at this point the Dow and the S&P 500 have been down for three trading sessions in a row.  But the big news is what is happening over in Europe.  Tuesday’s crash represented the largest one day move for 2 year Italian bonds ever, and Italian bank stocks are now down a whopping 24 percent from their April highs.  Overall, European banks have fallen a total of 11 percent over the last four days, and it isn’t just banks in troubled countries such as Italy and Spain that are hurting.  The biggest bank in Europe, Deutsche Bank, just keeps on tumbling and is now just barely above all-time lows.  A few days ago when I wrote that the next global economic crisis “could be just around the corner”, there were some people that criticized me for making such a statement.  Well, as you will see below, now this fact has become so obvious that even George Soros is saying it.

Those that are ignoring what is going on in Italy are making a tragic mistake.  Italy is the third largest economy in the eurozone, and even the Wall Street Journal is admitting that its bond market is “in meltdown”…

Risk aversion is back. Italy is the focal point, with its bond market in meltdown, its politics in crisis after President Sergio Mattarella blocked the formation of an anti establishment government, and its credit rating under threat.

That is all now making bigger waves: Europe’s deepening troubles and disappointing global growth signals are sparking a sudden rally in haven bonds like U.S. Treasurys.

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May 30, 2018

Gold Production On The Cusp Of Peaking

Gold is valuable because it is a finite resource. What happens when all available gold is mined and processed? There is still abundant gold deep within the earth, but it has not yet been found. Mining companies are unable, to dig deep enough. It is difficult for them to know where to locate this deep gold. All known locations have been depleting for years.

That is the reason mining gold has become more difficult and output is expected to begin decreasing steadily. The precious metal is becoming harder to find.

Most of the world’s gold was mined before the 1848 Gold Rush era. Since 1950, 125,000 tons of gold has been processed, which is approximately two-thirds of all gold ever mined. All of the gold that could be accessed easily has been mined.

Gold cannot be manufactured or created. It can only be mined from the earth’s crust. If we want more gold, companies, and investors will need to begin allocating more capital to exploration companies.

According Eugene King of Goldman Sachs, known mineable gold reserve may be gone in 20 years. The definitive word here is “known.” Gold mining companies are gearing up for a new era of exploration deeper below the surface than ever before. This means these companies will be incurring new costs at the same time their profits are decreasing. That is the reason why so few new mines are being excavated and few new projects are being started.

The earth’s easy-to-find gold has already been found and mined. There will not be another California Gold Rush. The search for new gold becomes increasingly challenging and expensive each year. Outdated equipment and technology need to be replaced.

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