(1) usually am not thrilled about Mauldin as never forgave him for his 'muddling through' meme back a decade. Let us just say Mauldin is not Armstrong.
Otoh, unlike Armstrong who appears to mumble to his computer and come up with correct answers, Mauldin ostensibly dialogues w/ a lot of real people and amalgamates the result for us in bite-size packages.
(2) I knew some folks who did big and sustained dark trades leading up to 2008, whereas I myself merely circumvented the killing quarter Q4 by having modulated overall exposure to the worst parts
the same folks are at least talking like it was 2007 November
(3) a reminder of my thoughts at the time Message 24155325 2007 12 21
2008 Q4 I was energised and enthusiastic Message 25266654
even as my annual gain was trimmed but it was positive Message 25285730
was positioned so Message 25285735
(4) By the time Q1 2009 came around, whilst I was trying to save souls Message 25376471 , I was also busy buying for the gold citadel property club Message 25508306 , that which returned to the seeker high double digit / almost triple digit gains before his estate planning exercise early 2012
(5) Anyway, we may have another 6 months of excitement before frenzied excitement, and the 2020 election has little to do with my expectations. My fear is driven by a lot of corporate bonds getting downgraded
Mauldin's good-enough summary mauldineconomics.com
Six Bears
We’ll start by noting six events/trends, in no particular order because they’re all important.
First, worldwide economic growth is weakening, with some key markets approaching recession. This week the International Monetary Fund reduced its 2019 global growth forecast to 3.0%, the lowest since 2009 when recession was still underway. They think it will improve to 3.4% in 2020. That’s better than the alternative but not much of a recovery.
Note, that’s the global average, which would be lower without considerably above-average growth in China and India. IMF pegs US growth at closer to 2%, with Japan and most of Europe even lower. Problems in China could worsen the IMF’s outlook quickly.
Second, if you don’t want to believe the IMF (and there’s reason to be skeptical), look at global shipping trends. The economy is increasingly digitized but the movement of physical goods is still its circulatory system. The latest Cass Freight Index data shows global blood pressure is dropping, when looking at the trends on both the total shipment and expenditures basis. Shipping volume has been down for 10 straight months on a year-over-year basis (hat tip Peter Boockvar).
Third, monetary and fiscal stimulus is proving less effective. Not that it was so great last time, but it helped. It also had side effects that may have reduced its usefulness. You can’t force credit on those who don’t want or need it, even at zero or negative rates. The European Central Bank and Bank of Japan are learning this the hard way.
On the fiscal side, the 2017 US corporate tax cut helped but the trade war offset some of it. Other countries, because they don’t have the dollar’s “exorbitant privilege,” have less fiscal flexibility than the US. Hence we see, for instance, Mario Draghi practically pleading with European governments for more stimulus spending and those governments shrugging their collective shoulders. They can’t do it.
Fourth, the US budget deficit is huge and growing. As I’ve shown, a recession in the next few years will likely push it far higher as revenue drops and spending rises. The Treasury’s increased borrowing is also having an effect on credit markets.
The investors who aren’t plunging into stocks seem to be holding more cash. Money market balances have been creeping up. A little caution might seem to be in order, but it matters where investors store their cash. If it’s not available for the banking system to grease its wheels, bad things can start happening. (More on that in a minute.)Fifth, we are starting to see confidence break in important corners of the capital markets. The WeWork IPO turned into a fiasco. In fact, the entire company looks just like the train wreck Grant Williams said it would be. I don’t see how anybody could look at the business model of WeWork and not see an obvious hustle. What does that say about the supposedly brilliant venture capitalists who threw cash at the company? Nothing good. Though maybe they knew what it was and just figured they could flip their shares to the public before it fell apart. If so, they appear to have been wrong.
But the broader point is that once-invincible Silicon Valley unicorn companies are losing their allure. It turns out business success is hard when you have to actually, you know, generate more revenue than expenses. Other WeWork-like stories are probably coming. Nor is it just unicorns; look at Boeing’s struggle to fix the 737 Max planes, and the shortcuts we are learning it took. These are bad signs for a market that needs earnings growth if it is to maintain current prices, much less see them rise further. (Note: I would not be afraid at all of flying a 737 Max on a US carrier. Just saying…)
Sixth, as I was wrapping up this letter, the latest Ambrose Evans-Pritchard column hit my inbox. He read the IMF’s latest financial stability report and came away with a distinctly darker view:
The International Monetary Fund has presented us with a Gothic horror show. The world’s financial system is more stretched, unstable, and dangerous than it was on the eve of the Lehman crisis.
Quantitative easing, zero interest rates, and financial repression across the board have pushed investors—and in the case of pension funds or life insurers, actually forced them—into taking on ever more risk. We have created a monster.
There are ‘amplification’ feedback loops and chain-reactions all over the place. Banks may be safer—though not in Europe or China—but excesses have migrated to a new nexus of shadow-lenders. Woe betide us if this tangle of hidden leverage is soon put to the test.
According to the IMF, globally there is about $19 billion of “debt-at-risk,” in which a global slowdown and/or recession would render borrowers unable to make their payments. I have written a great deal about the high-yield and leveraged loan market in the US, but globally it is much worse.
“In France and Spain, debt-at-risk is approaching the levels seen during previous crises; while in China, the United Kingdom, and the United States, it exceeds these levels. This is worrisome given that the shock is calibrated to be only about half what it was during the global financial crisis,” it said.
…In Europe, almost all leveraged loans are now being issued without covenant protection. The debt to earnings (EBITDA) ratio has vaulted to a record 5.8. Is the ECB asleep or actively promoting this?
The IMF’s directors call for “urgent” action to stop these excesses but in the same breath suggest/admit that the cause of leverage fever is the easy money regime of the authorities themselves—that is to say the central banks and their political masters who refuse, understandably, to permit debt liquidation and to allow Schumpeter’s creative destruction to run its course in downturns.
This is all going to cause precisely the crisis that I mentioned last week with pension funds. There is no way they can make the returns they need to meet their obligations. The next serious global recession/bear market will create a death spiral for many pension funds, requiring extraordinarily painful bailouts, to the point where they may simply default on the obligations. Don’t think that it can’t happen.
So that’s a quick survey of where we are. Now let’s add something else to the mix.
Repo WeirdnessBanks are a place where you store your cash, right? Not exactly.
When you deposit money in a checking or savings account, you aren’t just letting the bank hold it on your behalf. You are lending the bank that money and the bank is borrowing it. That’s why deposits show as a liability on the bank’s balance sheet.We think of banks as lenders, and they are, but they’re also borrowers. They make money by lending at higher rates than they pay borrowers, and by leveraging their deposits via fractional reserves.
This is obvious if you think about it. How can your bank simultaneously a) promise you can withdraw your cash on demand and b) lend that same cash to someone else? That’s possible only because they know only a few people will want their cash back on any given day. And if cash requirements are more than expected, they can borrow from other banks or the Federal Reserve, as needed.
Modern central banking and regulatory practices have practically eliminated the old-fashioned bank run. It still happens occasionally, but the system can absorb it. That’s because, while depositors can withdraw cash from a given bank, it is hard to withdraw from the banking system. Even if you buy gold, the gold dealer will probably deposit your cash in their bank, leaving the system exactly where it was before.
Now, the system is vulnerable if too many people decide to hold physical paper money, or they transfer deposit money into other instruments banks can’t leverage as easily. Central bank reserve requirements also play a role. The banking system is far more elaborate than the most complicated Swiss watch but it just keeps on ticking… until it stops.
Something weird happened in September, for reasons that remain a little murky. The repurchase agreement or “repo” market seized up. I’ll spare you a plumbing lesson; all you need to know is that repos are really, really important for overnight funding. Without them, it’s very hard for banks, brokers, funds, and other market participants to square their books. Modern banking simply wouldn’t function and the system would shut down.
Now, this wasn’t a catastrophe. The Fed injected some liquidity and everything seems okay for now. The important part is that it shouldn’t have happened and worse, apparently no one saw it coming.
We had a string of similar hiccups in 2007–2008. All were manageable but eventually they added up to something much worse. So, this wasn’t a good sign for market stability.
That’s the problem with unconventional monetary policy. It may solve your immediate problem but create bigger ones later, just as Bastiat said. We now know the Fed’s 2017–2018 rate hikes, concurrent with the balance sheet reductions or “QT” (quantitative tightening) was probably too aggressive, as even the Fed now tacitly admits. I said at the time they were running a two-factor experiment with unpredictable results. Could we now be seeing them? And if so, are they over?No one knows, but the Fed looks rattled. And a rattled Fed isn’t what we need. |
