Below, we re-cap market signals for the month of November, giving special attention to junk bonds (see video here as well) as the first shoe to drop as markets try to run, in vain, from an approaching bear.
A Rocky November
The waves off Montauk on Thanksgiving morning were crystal clear and cold as…well… just very cold. People literally surf out here with icicles on their wetsuits.
But the sun is shining and the crab legs are boiling as I take another look at, what else: the now gyrating US stock and bond markets.
October and November got a little rocky, eh?
If you recall, I warned of this October/November volatility back in, well…June. Don’t believe me? Fine. But here’s the clip…
How did I know this? Tarot cards? Crystal ball?
I just watch the bond spreads. Boring, yes, but that’s what Tom and I do.
With $14.3T of current debt on the credit books of the US business sector, it’s little surprise to us at Signals Matter that volatility would return with a vengeance across the major exchanges as bond supply climbed against a tightening Fed.
It’s just that simple, but few want to see this.
Certainly not the sell-side media.
As the standard fare of financial prompt readers stare into cameras talking about earnings, profits, GDP hopes and Trump tweets along with an endless stream of other infantile jabbering, they are, as usual, ignoring the obvious light house in their own media-created fog.
Like squawking chickens interviewing one nervous pundit after the next, this special class of financial cheerleaders seem to be utterly perplexed by a NASDAQ losing 3% in a day, or the DOW dropping 400 points in an afternoon.
After all, for nearly a decade, the markets did nothing but go up. We had hundreds and hundreds of consecutive trading days without a single market dip greater than 5%.
This made a lot of us complacent.
Complacency, of course, makes us lazy—in everything: romance, sports, ambition, work, creativity, health and, of course, prudent investing. That is, we start to overlook things.
But this dangerously artificial market, as well as its recent signs of woe, is actually quite easy to see through, if you are paying attention…
In short, and I’ll say it again: it all comes down to debt.
That is, rates are rising, which means markets supported by debt are gonna be falling.
Furthermore, whatever temporary rallies we may see going forward (as markets don’t just go straight down without a fight), they cannot stop the inevitable (and fast-approaching) trend south.
That is, right now we are seeing the proverbial fish flopping about on the dock. Markets are no different. They die slowly, and then all at once…
Driven exclusively by years of historically unprecedented low rates, cheap borrowing, stock buy-backs and inflated earnings (doped by a legalized-fraud known as Ex-Items accounting), the good times we’ve seen since 2008 are starting to feel less “good.”
Or stated otherwise, bad times are ahead. Really bad times.
How do I assert this with such confidence?
As I’ve said here and here by video, and written here and here online, nothing kills a debt-driven stock bubble faster than rising rates, because rising rates means rising debt costs, and rising debt costs makes it harder for debt-soaked companies (and countries) to keep pretending all is well.
Indeed, rising rates are the “interest-expense iceberg” about to sink this market of “Titanic debt.” With current corporate debt in the US at greater than 40% of our GDP, that debt Titanic will most certainly…SINK.
Stated simply: beware.
For over 18 months now, we at Signals Matter have been calmly tracking the debt orgy unleashed by the Fed’s post-08 policy of keeping/suppressing rates to the floor/zero-bound.
Goats, not Heroes
This “stimulus” measure has made the Fed look like a hero for years, but as I’ve written here and many other places, these heroes are one day going to be remembered as goats.
Such low rate policies, we’ve steadily maintained, create borrowing promiscuity (i.e. massive debt bubbles) in everything from sub-prime car loans to sovereign balance sheets.
Recently, I’ve personally seen countries like Italy, Argentina and Turkey teetering under the deadly weight of their un-payable debts.
But we don’t need to look only at the looming disasters in the EU or the current misery in emerging markets to see the increasingly obvious signs of a ticking debt time bomb right here at home.
All Surface, No Substance
The US, and its increasingly volatile markets, is beginning to show the first hints of over-borrowing and hence market party-fatigue…
As I’ve often written, low rates are fun, for a while. They create a “debt keg party”—inducing an entire swath of publically traded companies to borrow and borrow.
At the same time, their self-seeking CIO’s have wrongly used this leverage (borrowed cash) to buy back shares, pay dividends and push up earnings (and hence earnings per share data) rather than invest in their own CapEx.
This makes markets and stocks “appear” strong, and appearances can last for years. But as von Mises warned, the longer we live under the fake “appearance” of debt masquerading as a “recovery,” the greater the disaster that follows.
But such short-sighted “appearances” and good times also makes CIO’s rich, as they are paid, and thus incentivized, by the share price, not the genuine health of their balance sheets or our nation’s fiscal future.
But Wall Street has always been a wolf den. It’s every man for himself, not flag-waving notions of a “greater good.”
As a result, executives have been pumping up stock prices, not productivity. Instead of using cheap debt to improve company expansion and national productivity/prosperity, these over-paid anti-heroes focused almost solely on borrowing to buy back their own inflated stocks and selfishly reap the greatest rewards.
How do I know? Well, a lot of these guys (schoolmates, old colleagues etc) have second homes right out here in the Hamptons. And most don’t deserve em…
In short, this is by no means the greatest generation to lead Wall Street…
First the Party, Then the Hangover
Of course, after every party (including a debt party), comes the hangover, the invoice and “the morning after” regrets…
This may explain why General Electric, the once revered and legendary symbol of American business acumen, has lost over 50% of its stock value this year alone.
Talk about a sobering moment…Talk about “morning after” regrets.
But given the fact that General Electric has 115$ Billion of debt on its books, one can hardly feel too sorry for (or surprised by) its fall. In fact, the S&P ratings folks recently (finally) downgraded GE’s bonds to just one breath above “junk” status… aka junk bonds
General Electric, a “junk” bond? (Frankly, TESLA, as a similar metaphor of form over substance, is an equally telling symbol of CEO fluff marketed as genius.)
In fact, the list of cash-strapped companies on the US stock market is in fact dangerously long, which means the danger ahead is frankly quite obvious.
But wow, General Electric? Really? Who would ever have guessed it?
Then again, who would have ever guessed that Bear Sterns, the once revered bank that lived through the crash of 1929 would be the first to overdose on its own debt party in the crash of 08?
But 08 is not much different than today: Then, as now, markets got over their skis in bad borrowing and massive debt.
In 08, the debt monster de jour was attributed to sub-prime mortgages.
Today, it’s the same type of monster, only this time it’s far larger, as its tentacles extend over a far greater range, menacing just about every asset class, from real estate and car loans to corporate balance sheets, national deficits and individual families.
What Happened to Us?
How did we get here? Why are we drowning in debt?
That’s fairly easy to see by now. All that free monetary beer (money printing, debt and low rates) handed out by the short-sided false idols at the post-08 Fed got America drunk on borrowing.
Only this time, the drunk driving, and debt levels, coming out of DC has never been so reckless.
Again, today’s “leaders” in DC and Wall Street are anything but our “finest.” Not only were most of the Fed staffers inebriated by their own Keynesian moonshine, our C-suit executives were as greedy as our policy-makers were debt-dumb-drunk.
In what was admittedly an overly-long blog, I recently tracked the sordid history of such “anti-heroes” in some detail. The evidence (from FDR or Nixon to Meriwether or Elon Musk) of bad behavior is breathtakingly clear.
More Debt Doesn’t Solve Old Debt Problems
A decade of easy credit, borrowing and printed money only works if you have something other than an artificially-inflated securities bubble to show for it.
But other than falsified propaganda about rising GDP, full employment and surging earnings, this country’s economy has not seen the “trickle-down effect” from the Wall Street open-tab at the debt bar.
As I’ve demonstrated with math rather than rancor, Main Street America and its abused Middle Class have not climbed in tandem with the smug finance guys steering/leveraging our markets.
To the contrary, America’s regular Joes and Janes have taken it on the chin and in the gut.
And things are only about to get worse, much worse.
How It All Ends
As demonstrated in my recent blog entitled “The One Market Chart that Explains Everything,” the recession and market bear ahead is fairly easy to both explain and see coming.
That is, as rising rates hit our historically un-matched “everything” debt bubble, the party ends.
And if you think rates can stay low forever, well, that’s just wrong.
In fact, rates have nowhere to go but up, as both the Fed (ala the QT pivot) and the bond market (about to be slammed by a $1.8T bond wave) are mathematically on an auto-pilot direction pointing south rather than north.
There’s No Turning Back
That is, as a nation, Main Street and market, we’ve already crossed the debt Rubicon. There’s no turning back. The Fed has not outlawed recessions nor discovered a magical way to solve a debt crisis by taking on more debt.
Just as a parent does a child’s natural immune system no service by administering antibiotics for every sniffle or sneeze, the central bank has done our economy no service by not allowing a natural correction to run its course in 08.
Rather than let Wall Street take its well-deserved lumps (and criminal negligence charges) in 08, America avoided a high-fever recession then. But the post-08 debt stimulus which DC prescribed us only made the fever (recession) to come infinitely more dangerous than the one they “cured” in 2008.
At $3.7T and counting, the current junk bond market in the US is likely where we’ll see the first thermometer signs that this bull market is about to die, and die hard. Thanks to distorting the entire bond market, the Fed has led to a 60% increase in junky companies issuing junk bonds …
Even in benign, post-08 conditions wherein the Fed coddled the credit markets with low-rate antibiotics, junk bond issuers have struggled.
But imagine how quickly this weakest sector of the bond market will suffer as yields/rates rise in the over-all bond market bubble.
Defaults in specifically in the junk bond sector will skyrocket, pushing overall rates even higher and thus adding to the bear’s acceleration when the bond dam bursts.
The Fed Won’t Save You
Meanwhile, for those who think the Fed can and will contain rates, think again.
Despite public grandstanding, the Fed knows that it cannot contain a bear market move unless it can reduce short term rates by at least 4%.
Unfortunately, the current Fed-funds rate in the US is only at 2.25%, so there isn’t even room to “reduce” rates by 4%.
Why do you think Powell is pushing so hard to get the national rate to 4% by 2020? Because he knows a recession is imminent and needs to get rates up, ironically, so that he can try to push them down in the next crash of a market bubble that his central bank created.
But as I’ve said so many times, even this desperate strategy is a moot point, as the Fed is now out of card tricks.
Remember, it is the bond market, and not the mad academic smugs at the Fed, who ultimately decide interest rates.
As the US Treasury Department issues more debt to cover our never-ending deficits, the US bond supply count will rise by $1T+ in 2019, thus pushing bond prices down and interest rates up.
Again, there’s no getting around this. It’s basic math folks.
The die has been cast, the debt Rubicon has been crossed. The coming yield shock in the bond market—and hence disaster in the debt-soaked stock market, is no longer a question of “if” but simply a matter of “when.”
And as for the “when,” well… we at Signals Matter are keeping a careful eye on this, and our subscribers will be the first to hear our warning bells.
For the rest of you, stay informed, watch those rates and be careful out there.
November 25 2018