Debt Rally Cracking? Equities Re-Valuing
A: The party never lasts forever. There are so many crazy things going on right now, mostly bearish, that to me it feels like the ground under our feet is very 'fra-gi-le, I think that's French'. Props to anyone that gets that movie quote!
Bloomberg reports, "Debt Rally Cracking as Double-Dip Fears Haunt: Credit Markets":
The rally that drove corporate bond prices to the highest in six years is showing signs of strain as worsening economic data rattle investor confidence that the U.S. can avoid relapsing into recession.Here is a list of what I see happening right now:
A benchmark gauge of U.S. corporate credit risk for companies ranging from Alcoa Inc. to Wal-Mart Stores Inc. has climbed for five days, reaching the highest in seven weeks. Relative yields on corporate bonds have been little changed this month, after tightening in July.
“It’s inevitable that we fall into a double-dip recession,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “The employment situation went into a double-dip, housing is going into a double-dip” and “the next stage is the overall economy will go into a double-dip.”
Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates reached the highest in three months relative to 10-year Treasuries.
Considering the rally in debt markets we saw, built on a fed engineered bank recapitalization environment, anything is possible on the way down. There are warning signs everywhere. Contrarians like to buy in times like these, but I just get the feeling it could get worse before it gets better due to where we came from over the past 12-14 months. If this is all we have to deal with, then we got lucky. Although Im skeptical and in the re-deflating camp, lets hope Im wrong.
Posted by Ethan
Wed Aug 25th, 2010 11:15 AM
Quote from "A Christmas Story"...
Posted by Noah
Wed Aug 25th, 2010 12:57 PM
props to you Ethan!
Posted by lars
Wed Aug 25th, 2010 08:36 PM
N,
I agree with your general pessimism. We are now generally seeing over the backside of the blip created by massive monetary/fiscal stimulus. And what we see isn't pretty. The roller coaster is once again picking up speed as it heads down: and, I suspect the ride will be wild with fiscal policy hamstrung and further monetary policy ineffectual.
Like the pilot said, "the good news is we're picking up speed, the bad news is we're losing altitude."
Posted by mh23
Sun Aug 29th, 2010 08:40 AM
Noah:
As always, your insights and views are appreciated and thought provoking. I believe that we have been in a deflationary environment since 2008, and it has only been the massive efforts from the Fed that prevented and immediate collapse of the financial system. In fact, were the Fed to step aside tomorrow, and allow the mortgage market to survive on its own, I think there is a relatively high probability of another panic and a fresh run on financial institutions.
Clearly the Fed has made the decision to try and reflate us out of this and worry about the consequences later. There may have been a moment in tme when we could have allowed market forces to proceed uninterrupted, but we are way past that. Ultimately, I think the Fed's end game is to take on all private debt, engage in as many fresh efforts as Q.E. as needed, and ultimately debase the currency over time.
Right now, for sure deflationary forces are still very profound, but I happen to be in Warren Buffett's camp that investors with a longer time horizon need to start worrying about inflation in the next 5-10 years. I agree fully that the market could easily have a major leg down from here, and retest the March '09 lows, but I also think that for those seeking yield who can truly tie up capital for at least 5 years, the best bet are equities, particularly names like JNJ. PG, XOM, INTC etc that have massive amounts of cash and pay a dividend well above the ten year treasury.
Also, I believe that the policies that have been promulgated but the White House and Congress have infused an enormous amount of uncertainty into an already fragile economy. At some point in the future, fiscal policies will change toward helping the private, rather than the public sector expand. When that happens, we may see the beginning to a new secular bull market in equities.
Posted by jeff
Sun Aug 29th, 2010 01:43 PM
Hey folks! Just back from vacation...no TV...limited cell service and e-mail...and I tried to stay away from the newspapers. the pessimism is just too thick.
MH23 I am much more in your camp than the "end of the world is nigh" camp. I'd like to discuss why that is, but first a comment on questions about my last piece on bank loan delinquencies. Banks (away from the too big to fails who should be considered arms of the government)have indeed aggressively reserved against loan losses and have raised tons of capital. It is true however, that unlike in the 1990s, regulators are not forcing them to declare borrowers whose collateral value has fallen in "technical default" as long as they are paying their mortgages. The big difference between the residential real estate market (most non government banks don't hold much of this junk on their books that isn't guaranteed by the government) and commercial markets is that commercial property holders are largely trying to hold onto their properties in hopes of one day making money (despite the occasional high profile mailing in of keys). Residential real estate mortgagors are walking away because everyone is telling them to. In some markets this may be smart, in some markets it will be dumb...especially if new housing starts continue to stay at miniscule levels. Overall, what the government has tried to do is keep all debt markets from having to mark values to "liquidation levels". I wrote a piece about this and pointed out that in the machinery and equipment appraisal business the rule of thumb for liquidation is a 30% discount from "normal market price" whatever that would be at the time.
The good news for the economy is that the "stretch things out" strategy has worked (very apparent from the number of frustrated distressed real estate and debt players out their who have just not gotten their "fish in a bucket moment") and it did in fact forestall the very real threat of a complete meltdown of the financial system. It has also given many players time to improve the cash flows of their businesses properties through efficiency measures. I think the legacy of this downturn will be it's major catalysis of new efficiency improving technologies, most of which will be energy related, because a lot of the gains from automation/computerization have already been made.
So the $64 trillion question is: Is the carrying capacity of the economy for all of the debt that was accumulated in the boom sufficient or must we devalue/default to work our way out?
My answer is: If you know the answer to the question god bless you, your the next George Soros. I'm not and I don't. What I would offer is: 1) that we have survived similarly bleak conditions in the early 1990s. The banks were broke, were lying to a much greater degree than today and forcing liquidation of loans was a policy mistake that has not been repeated. 2) That the cost of carrying the federal debt burden was about the same as it is today, despite the fact that the overall debt is indeed much higher. This is largely because WE ARE NOT ALONE. The world has debt problems and the US is still among the best credits on earth...at least according to the markets, so they continue to allow us to borrow at low rates. This will give us breathing room to fix our problems. Now our dysfunctional government and not as smart as advertised President (on economics and human nature at least) have done a poor job of leadng the country towards solutions to our problems. Jimmy Carter was pretty comparable. My guess is Obama is one and done and hopefully the next meglomaniac we pick will "get it" a little better.
I am concerned about the economy and there is certainly the potential for a double dip (which wouldn't be nearlly as bad because we don't have an over-inventory/over employment situation)....though reading a lot into recent figures is a mistake. The year-to-year comparisons are of the economically dead summer months, and comparisons are versus inventory snap back, cars for clunkers and resi credit pumped up numbers last summer (which incidentally caused an unusual June/July/August ramp up in activity versus the normal sequential deceleration.
I am bearish on the stock market as long as the averages trade below their 200 day moving averages. But a massive head and shoulder top that dosn't break down and go lower eventually becomes a formidable support level if it flags out and finally heads higher.
Feeling comfortable being a contrarian I am happy to proclaim my belief that the economy is not dead, that the U.S./capitalism have not handed over leadership in the world to some other system and that eventually this difficult period will pass and we will see a period of renewed economic opportunity, a better national and consumer balance sheet and a better outlook for New York City real estate.
Stop watching CNBC and go take a hike. Summer is almost over!
Posted by John UWS
Tue Aug 31st, 2010 12:01 AM
Hi Noah,
It was a long summer for me....3 business trips + vacation and now back at work....
I do see your points, which are all valid but I am at Jeff's camp...
His last line had me on the floor laughing: Stop watching CNBC and go take a hike. Summer is almost over! :-))) LMAO !!!
Posted by In Debt We Trust
Tue Aug 31st, 2010 10:07 AM
2 questions Jeff and Noah,
1) Last year, equities continued rallying well into October b/c of thin market activity and flash trading (the latter if you believe pundits like ZH). Why haven't we seen a repeat of that when liquidity conditions are the same (e.g. rock bottom rates)?
2) What are your feelings on gold? Is bullion deflation proof?
Posted by Noah
Tue Aug 31st, 2010 10:43 AM
sorry guys, im out of everything right now but finishing this analytics platform. Hit a big bump 2 days ago, tying ACRIS and Listings together. Fixing it now but that means Im back to identifying data integrity breaches so we can fix them for launch. cant focus on anything else until this is done...data mining sucks after the 278th day
Posted by anonymous
Tue Aug 31st, 2010 12:43 PM
In Debt,
I think the gold question is interesting. I would guess that it is more of a trade than a long term inflation hedge. At the beginning of the crisis, there was a massive flow of capital to safe havens, i.e. gold. In another potential crisis, or aftershock, I think that fact that people have already bought in will make the difference. E.g., if hedge funds need liquidity, they may need to sell their massive gold holdings. I would guess the best environment for gold would be a high, but manageable rate of inflation enough to drive people to the hedge but not enough to destabilize our markets or economy. I think the longer term question is what is gold really worth once the hot money is gone. My guess is less than it is now, which keeps me skeptical, but I don't like to trade short-term trends, and gold can go much higher on speculation, so I prefer to stay out.
Posted by Jeff
Tue Aug 31st, 2010 06:32 PM
Investor Intelligence sentiment numbers are at lows that in the past have resulted in positive stock market returns 3 months out 94% of the time. This is no guarantee and the technicals still stink....but are a lagging indicator by nature. I see the mid-term election as key. Market pros and business people pretty much hate the President, a good commupannce in the polls and potential move toward the political center would be a great catalyst for stock market investments, business investment and hence the economy. A significant decline in short-interest recently, dosn't reflect bullishness on the part of hedge funds so much as frustration with the whippy sideways action. If a market trend is established in the next couple of months, which could make/save hedgies years they will jump on it. The contrarian in me says the "pain"
trade is higher.
Posted by rootless cosmopolitan
Tue Aug 31st, 2010 09:58 PM
Jeff,
too much technical argument for my taste. Even if there was an upward market trend over the next couple of month, at latest a negative GDP-growth reading for Q3 2010 would probably bring the market down again, if it wasn't brought down before due to a continuing flow of economic news of the kind like the good news about the number of home sales last week.
Negative GDP-change readings for the next quarters are highly likely, according to the data of the Consumer Metrics Institute:
http://www.consumerindexes.com/
The hard data say another recession is imminent (or a continuation of the old one, after the effect, called "recovery", of the government stimulus, w/o triggering a self-sustained economic expansion, has been fading). The recession is still being dismissed widely, widely acknowledged is only slower growth for the remaining year part, although I haven't seen that anyone who dismisses the high probability of an imminent recession can really back up this with data and statistics, unlike the ones who base their recession calls on those.
Posted by Fred
Wed Sep 1st, 2010 09:57 AM
I will refrain from using the term 'decoupling' but the evidence continues to suggest that growth will not be in the US and Western Europe, but in BRICs. Today's figures out of China & India seem to confirm this. Furthermore, Germany is actually doing particularly well. While traders wait for the great deflation to take hold, many seem to have forgotten who benefits the most from this meme? What will be very interesting is what happens when the administration realizes that not extending the tax cuts will reduce GDP by 1% to 2% and most surely push the US back into recession, what happens to munis? The t-bill trade is done - look at the 10yr. Materials have bucked the trend over the last two months and are now clearly in another bull trend - driven mainly by fundamentals. I bet Hugh Hendry might even admit that he's got to get a new horse.....
Posted by ugg boots london
Thu Sep 2nd, 2010 12:48 AM
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Posted by Sexy Costumes
Fri Sep 3rd, 2010 04:55 AM
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Posted by New York Real Estate
Fri Sep 3rd, 2010 06:20 AM
As you said, anything is possible on the way down.
The BRICs group will have tremendous impact in the economy to come and the outcome is very unpredictable...
Posted by janine67
Fri Sep 3rd, 2010 02:04 PM
Things do feel very fragile. Here's my question for you, do you still think manhattan needs more inventory with things so crazy (which I define as no rhyme or reason to things right now)?Upredictable is the theme of the moment but for example, here's my predicament, every property I see that I like, so does the rest of the buying population and it disappears quickly which I don't get. I'm also flabbergasted when I bid on something and the agent comes back to me with a NO DICE, they got an all cash offer at ask. Pardon my french but WHAT THE HELL? It's just very confusing right now. I feel pressure even though the economy is saying otherwise right now.
Posted by Noah
Fri Sep 3rd, 2010 02:50 PM
in this market, buyers pounce on the good stuff that is priced right leaving the rest of the market in the dust. So rarely is there a time when high quality-well priced listings are not moving with no buyer interest. Except for maybe the 9 months after lehman.
People dont believe it in this market. So, when the good stuff goes, the pace of sales falls until the new good stuff comes back on
That is what I refer to when I say we need more inventory!
Posted by MeekSheep
Mon Sep 6th, 2010 10:59 AM
Damn Spammers, you rolling something out to filter them away? Have you guys read the NYT article: http://www.nytimes.com/2010/09/06/business/economy/06housing.html?_r=1&hp yet? What's your thoughts on that kind of choice?
Posted by Noah
Mon Sep 6th, 2010 12:39 PM
Meek - The new site will be a registered system. Registered or Subscriber that is. But you will need to be logged on to comment on blog or talk forum so this will solve the ongoing and evolving spam problem.
I am ALL FOR letting the free market do its thing. The tax credit proved to be a costly failure, doing nothing but dragging forward future demand and incentivizing the wrong kinds of buyers to rush and buy a home. Not what we need. Calls for more stimulus are outright silly. This lull is an unintended consequence of policy action. They need to understand that. Any further actions, will lead to the same end result. Rather, let the market do what it needs to do, as it already proved to be bigger than all of us or any policy action. Let market forces equalize itself and if that means less demand until prices reach attractive affordable levels, so be it. Its a side effect of the biggest credit/housing boom then bust due to poor policy, poor modeling, poorly structured incentives (wall st), poorly structured loan products, poor regulation and oversight, and poor judgment on monetary policy leading up to the bust
Posted by rootless cosmopolitan
Mon Sep 6th, 2010 03:58 PM
Noah,
How does your posting system work currently, anyway? Sometimes it has happened, I posted a comment to one of the threads, then it said "your comment is awaiting moderation" or so, and the comment has never been posted. But the spam postings get through?
Posted by Noah
Mon Sep 6th, 2010 04:52 PM
Root - right now Movable Type Spam Lookup handles comment moderation. I add junk keywords. If you got that message, then there was an error on MT side that put your message into junk column. I try to sift through junk, but I get like 1,000 every few days. Its impossible to keep up. I may have deleted that comment.
New system will not be vulnerable to these types of issues. Launch next week. Not sure of day yet
Posted by laptop battery
Mon Oct 11th, 2010 01:02 AM
People dont believe it in this market. So, when the good stuff goes, the pace of sales falls until the new good stuff comes back on