Let’s discuss the reasons why. First prime yourself and read this FT article, dubbed The Seeds of the Next Debt Crisis.
I’ll summarize for lazy readers.
The shock that coronavirus has wrought on markets across the world coincides with a dangerous financial backdrop marked by spiralling global debt. According to the Institute of International Finance, a trade group, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to $253tn. The implication, if the virus continues to spread, is that any fragilities in the financial system have the potential to trigger a new debt crisis.
Overall, this huge accumulation of corporate debt of increasingly poor quality is likely to exacerbate the next recession. The central banks’ ultra-loose monetary policy has also fostered what economists call disaster myopia — complacency, in a word, which is a prerequisite of financial crises. The greatest complacency today is over inflation and the possibility that central banks will inflict a financial shock by raising interest rates sooner than most expect.
Some chart porn.
The shittiest of all the debt are leveraged loans. These are the loans doled out to private equity, which is used to create pyramid schemes fueled by cheap debt and for fees. The credit quality of it has never been worse.
I’ll use my Twitter account to show you some other things. Behold.
“Unless the Covid-19 outbreak can be brought back under control soon, we expect credit markets to continue to price in rising global recession risk,” strategists led by Daniel Lamy at JPMorgan & Chase Co. wrote in a note to clients late last week.
— The_Real_Fly (@The_Real_Fly) March 6, 2020
The coronavirus has hit Europe’s leveraged loan as opportunistic deals are cancelled, syndications are delayed on underwritten transactions and bankers renegotiate the terms being offering to sponsors on new deals as pricing widens across the board.
— The_Real_Fly (@The_Real_Fly) March 6, 2020
Corporate debt has exploded the past 3 years, most used to buy back fucking shares.
Let's take a look at what these companies have been doing to their balance sheets the past few years. (thread)$RCL pic.twitter.com/l3zyuiScME
— The_Real_Fly (@The_Real_Fly) March 6, 2020
So that’s why FAZ is outperforming and that’s why banks are getting hit the worst. Naturally should priced rebound, this post is Chicken Little. But I want to at least highlight the real risks associated with stock prices to market cap, which is often ignored because times have been so good.
The US 10yr 0.835%, -9bps now. If you want to read the credit environ tomorrow via an ETF — watch SRLN. The problem with those leveraged loan ETFs, like that one and BKLN, is the settlement of the underlying products is long and people sell ETFs like stocks and expect liquidity. If credit ever seized up, people who own those will get XIV’d.
NASDAQ FUTS are -70.
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I’m really hoping things get bad enough where a mandatory 2-4 weeks house arrest happens. Dinosaur companies who make people come in day after day will have to recognize the cost savings of having their employees be remote and not to mention the morale boost of employees. Driving into a stupid office just to sign into a server with a laptop anyway. Absurd.
House arrest is communist. Führer Trump says the virus is a hoax and the market would crash if he loses reelection.
I harvested my long bonds by last week. It was quite a good season. So good, I took the opportnuity to plant more, expecting to see 1.5% evnetually as I wrote.
I went to check on my new crops, and it’s like Jack and the fucking beanstalk. My jaw literally dropped (yes, I literally mean literally) when I saw that it went right past 1.5 and past 1.4, past 1 3/8!!
VIX futures are almost at a 9-year high. S&P futures back below 3000. FNGD looks like it will buy much more that a fun weekend.
Still, there’s no way I’m planting any SPY/QQQ, etc., even for a short term bounce. No matter waht happens on Friday, here’s what Monday holds:
1) Likely scenario is as I already predicted: 600-1000 total confirmed cases in the US. Since I’m the genius, and you are the masses, you tell me how investors will react to that
2) Secondary scenario: due to test shortage, the numbers could be much lower. Market may rally, in which case STFU.
This plague will drag on for months and even the most inhabitable shithole towns will catch it. *Hundreds of thousands* of confirmed cases by then.
GWB was inept at his handling of Katrina and 1800 people died, but at least those weren’t his voters. DJT will fuck his base “like the world has never seen”–a feat of the most biblical proportions.
Trump is fucked.
https://ibankcoin.com/flyblog/2020/02/29/hes-back-dr-doom-predicts-massive-decline-global-growth-plunging-chinese-gdp/
Also:
1) his number 1 care is himself and the stock market, and the market will probbaly reach -30% at this pace
2) he either has to cancel his rallies or his base dies
SOOOO much better than impeachment…
The amount of schadenfreude will be so ***over 9000*** on election day 2020 if the markets close below where they were on election day 2016.
Let’s think critically for a moment. If we can assume that the number of people that have reportedly died from this virus is “reasonably” accurate, then the percentage of people that actually die from the virus is much lower than the 2 – 3% estimates that MSM is reporting. The number of infected people is much, much larger than the number tested and reported. All you youngins out there should be looking at these corrections as gifts. There is no timing the bottom but there’s going to be a lot of well managed, low net debt companies with strong free cash flow on sale.
I would think that the cruise ships and nursing home give the best estimates, because those are the most likely scenarios where you actaully test everyone.
However, rememebr that the same assumption you use to lower the death rate down, you must aslo use to raise the R0 infection rate. So while you may lower the death rate for those *infected*, you will not change the death rate for the overall popualtion (ie, death rate for infection * infection rate)
30-yr bond futures busting a 5-handle move. Last time that happened was in October 2014 at the height of the Ebola scare.
*But there were even bigger moves the days after the Brexit vote.
I tried to warn you guys.
https://ibankcoin.com/flyblog/2020/01/30/will-things-go-back-normal/#comment-565707
Repeatedly
https://ibankcoin.com/flyblog/2020/02/05/downplays-alleged-chinese-breakthough-coronavirus-futures-dont-care/#comment-565875
https://ibankcoin.com/flyblog/2020/02/07/bond-yields-crashed-lows/#comment-565910
The markets did, too.
https://ibankcoin.com/flyblog/2020/01/31/happy-friday-coronavirus-getting-worse/#comment-565735
Check those charts now. The 4 Horsemen of the Financail Armageddon.
I’m betting that we set another record:
“Shortest time from ATH to Bear market (-20%)”
What bulls still are in denial about:
“ ‘Even if we aren’t hysterical about the health impact of the virus, it doesn’t mean the market and economic impact is going to be muted,’ he said.
‘It is the quarantining and essentially the shutting down of large parts of the global economy which is causing substantial economic and financial market damage,’ Riddell said. ‘My base case is things get substantially worse from now.’ ”
https://www.bloomberg.com/news/articles/2020-03-06/it-s-time-to-really-worry-says-manager-who-beat-98-of-peers?srnd=premium
So, the 2 existing strains are the base case. Naturally, some stronger strains will evolve and that base will crack.
Just to say it out loud (and to borrow a Trumpism), *a lot of people think that* everyone who voted for Trump deserves the guillotine–but getting killed by Covid will work just fine.