Wednesday, February 10, 2016

Are Credit Markets Warning of a Lehman-Style Crisis?

Are Credit Markets Warning of a Lehman-Style Crisis?

Stock markets around the world are mixed. European markets are higher for the first time in eight days, led by Spain's IBEX (+3.5%). Overnight, Japan's Nikkei (-2.3%) paced the decline. S&P 500 futures are higher.

Another night, another utter bloodbath in AsiaPac. Japanese markets are plunging. NKY down 600 from US session close and NKY is down 2200 points from post-NIRP highs. Once again banks leading the pain. Australia is also in trouble, after admissions of cooked data sent stocks lower pushing the ASX 200 into bear market territory.

MSCI's world index has entered a bear market - dropping over 20% from its April 2015 record highs. The 
average developed market stock is down 23% in the past year. 52% of all developed world stocks are in a bear market over the past 200-days (i.e. down 20% from the 200-day high). Not a single sector has avoided falling into a correction over the past year.

Janet Yellen's Humphrey-Hawkins testimony begins. On Wednesday, Fed Chair Janet Yellen will appear before the House Financial Services Committee as part of her semiannual Humphrey-Hawkins testimony on Capitol Hill. Yellen's prepared remarks will be released at 8:30 a.m. ET, and her session before Congress will kick off at 10 a.m. ET. At the testimony, Yellen will give her thoughts on the US economy and explain the rationale for the Fed's interest-rate hike in December. On Thursday, Yellen will appear before the Senate Banking Committee.

Janet Yellen's prepared Humphrey-Hawkins remarks were released at 8:30 a.m., they were a big disappointment:

*YELLEN: FINANCIAL STRAINS COULD WEIGH ON OUTLOOK IF PERSISTENT (so, there's chance things could go south fast

The bottom line this is simply a rerhash of the Jan FOMC Statement and does not offer enouigh dovishness for the market.

Credit. Credit. Credit. It sure feels like 2007 / 2008, only worse.

In my experience, when the crunch comes, bank CEOs lie.

There's a reason why the banks are being sold all across the world... because people are realizing once again that we don't know what's on bank balance sheets and central banks have no solution.

Credit, that's where the action is these days and really, where it has been for the last year. And I'm here to tell you the credit markets look to be pointing toward an increasing chance of a Lehman-style crisis, and bank CEO's
are certainly lying.

Hyperbole? Hardly! Take a look at this chart
, which shows the cost of insuring against a default on some of the bonds issued by Deutsche Bank (DB) …

You can see the cost of credit-default-swap protection is exploding. So-called "CDS" contracts act like insurance against bond defaults, and the cost of that insurance surges when investors grow increasingly worried about the ability of a government or corporation to make good on its financial obligations. These are the kinds of moves we've only seen twice in the last decade — during the 2007-09 credit crisis and the PIIGS (Portugal, Ireland, Italy, Greece, Spain) debt crisis in 2011-12.

And it sure as heck isn't just Deutsche Bank. CDS costs are jumping across the board here in the U.S., over in Asia and elsewhere in Europe. It's just a question of degree. Investment-grade credit spreads are now also widening notably, following in the footsteps of the junk-bond market. Spreads there began blowing out several months ago.

Japanese stocks plunged again o
vernight. So many investors are dog-piling into government bonds for safety that more than $7 trillion in sovereign securities are now trading at negative yields. 

Last but not least: Things are getting so bad that Deutsche Bank had to issue a statement saying it can make certain debt payments in the coming two years. That was followed up by a memo to employees today in which co-CEO John Cryan claimed the bank was "rock-solid." The mere fact the company felt compelled to say things are just peachy tells you they could be anything but.

I began warning of this possibility over 2,000 Dow points ago, and look at 
the carnage we're seeing now.

Yes, markets are oversold in the short term. We could easily see a bounce at any time, particularly if Federal Reserve Chairman Janet Yellen throws the bulls a bone in her Congressional testimony. That's exactly why the markets were not down much more yesterday.

At the same time, it's abundantly clear to me that central bankers have lost whatever control of the markets they once had. Investors are taking matters into their own hands because they can see the global economy slumping – and they know the bankers are rapidly running out of bullets.

If anything, the increasingly widespread adoption of negative interest rates is making things worse not better. I say that because bank stocks plunged further in Europe and Japan, and credit-market stress rose further, AFTER central banks there cut rates into negative territory.

More than one-fifth of the world's total GDP is in countries which have imposed negative interest rates, including Japan, the EU, Denmark, Switzerland and Sweden. Negative interest rates are spreading worldwide. And yet negative interest rates – supposed to help economies recover – haven't prevented Japan and Europe's economies from absolutely going down the drain.

Japan has had ultra-low rates for years and its economy has been terrible. Trillions of debt in Europe now trades at negative interest rates and its economy isn't booming.  Denmark, Sweden and Switzerland all have negative interest rates, but consumer spending isn't going up there. In fact, savings rates have been going up in lockstep with the decrease in interest rates, exactly the opposite of what the geniuses at the various central banks expected. Savers are scared. Lower interest rates have wrecked their retirement plans. 

The policy of negative interest rates has one agenda, and that is 
to drive small banks out of business and consolidate banking sectors in industrialized countries, increasing concentration and control in the banking sector. It also serves to provide a (false) further justification for abolishing cash.

The introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money supply.

Negative Interest Rates Are Aimed At Driving Small Banks Out of Business and Eliminating Cash.

It's not just European bank debt that's getting hammered. Yields on peripheral European countries are rising again, with Portuguese 10-year yields hitting a 15-month high. Borrowing costs in other "PIIGS" countries are also rising, while Greece's benchmark stock index just fell to its lowest level since 1990.

The 'momentum' play in stocks appears to be dying an agonizing death. Now that the FANG stocks and their brethren are starting to collapse, they are going to find it harder to get the loans that have propped up most of them. In fact, nearly all companies are going to have to learn to survive more on real not fantasy 
earnings – even as earnings may decline. That doesn't bode well for the markets for some years to come.

FANG stocks aren't the market's only problem. I'm more concerned about the speculative derivatives market where the big banks are playing Russian roulette with bets they can't even begin to cover when the derivative market implodes. They are betting trillions more than they can ever back up, hoping the feds will come to their rescue again. Not this time. Central banks are trapped and tapped out and won't be able to plug all the holes in the coming crisis. The systemic risk is extreme. The banks in Europe and government debt are outrageous. The central bank bluff is about to be called. We will soon see if there is enough ammunition left in the almost empty tool box,

The train has not only picked up speed, but it is no longer a nice evenly-paced trip until you get to your destination. It is now switching tracks unexpectedly, and you are no longer heading toward your original bullish destination. Smart thinkers and smart money will eventually figure out that the 'free train ride' strategy has run its course.

For the past three years, it has been clear that earnings did not support current valuations. There is plenty of blame to go around. But until the earnings situation improves, the market will be volatile and moving down. 

It is very likely that as this plays out a self reinforcing, very negative feedback loop develops and becomes entrenched and very difficult to overcome.

And finally we have this:

You know it's serious when the denials begin. Speaking in a Bloomberg TV interview, Goldman Sachs President Gary Cohn explained how "US banks took their medicine early," adding that "some European banks have been slow getting recapitalized." Having thrown his 'competitors' across the ocean under the bus, Cohn then unleashed his comments with regard Goldman's own spiking credit risk - demanding that "no one should question the viability of US banks."  REALLY, THAT'S THE BEST HE'S GOT?  WE LIVE IN A FAIRY TALE WORLD IN THE AGE OF DELUSION. THE MAN IS AT BEST AN IMBECILIC FOOL FOR DARING TO UTTER SUCH A PREPOSTEROUS LINE!

Goldman credit risk is soaring...

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