Another chart that bolsters Martin Armstrongs case that a Monetary Crisis is Beginning, though in this case it involves U.S. corporate debt. A monetary crisis will change everything with both banks and debtors facing rapidly rising rates. Prepare yourself – R. Zurrer for Money Talks

So many patterns that have held for decades seem to have broken down, leading to one of two conclusions: Either this time really is different in ways that appear to violate what used to be seen as iron-clad laws of finance, or those laws have been bent but will reassert themselves with a vengeance sometime in the future. 

The latest example is the relationship between corporate debt and default rates on that debt. Historically they’ve moved in the same direction, with higher debt levels leading to higher default rates. That makes intuitive sense because rising debt implies that borrowing is easier for less creditworthy companies who should be expected to default at a higher rate. 

But not this time: 

Here’s why default rates are subdued even as corporate debt levels hit records

(MarketWatch) – U.S. corporate debt levels stand above crisis highs even as default rates among the most leveraged firms remain subdued.

With an economy hitting its stride, it’s perhaps no surprise that the high-yield bond market is placid. The extent of the divergence between debt levels and defaults, however, is worrying to some analysts who feel rising corporate indebtedness will eventually catch out unwary investors and deflate the junk-bond market.

But beyond complacency John Lonski, chief economist at Moody’s Capital Market Research, argued that globalization and the tendency of U.S. businesses to hoard cash as reasons why corporate debt levels may no longer move in sync with default rates and credit spreads.

The high-yield default rate in the fourth-quarter of 2017 fell to 3.3%, even as U.S. nonfinancial-corporate debt ended in 2017 at 45.4% of GDP. This compares with a much higher default rate of 11.1% in the second quarter of 2009, with corporate debt levels at 45% of GDP. Granted, the current levels come with the economy in the eighth year of an expansion, while the second quarter of 2009 marked the final quarter of the longest and deepest U.S. recession since the Great Depression.

The yield spread between high-yield bonds and safe government paper, as represented by the 10-year Treasury note narrowed to an average 3.63 percentage points in the fourth quarter of 2017, from an average 12.02 percentage points in the second quarter of 2009. The tight credit spreads reflects that borrowing costs are still close to historic lows, and that investors are demanding minimum compensation for holding arguably the riskiest debt in the bond market.

Moody’s Analytics

 

One answer “might be supplied by the ever increasing globalization of U.S. businesses where the more relevant denominator is not U.S. GDP, but world GDP” said Lonski.

The fortunes of U.S. companies are now woven into the broader global economy. When commodity prices took a hit in 2015 and early 2016, crimping growth in China and other emerging markets, high-yield bonds were also slammed.
With commodity prices on the rise and global growth making a comeback, it’s no mystery that issuers of high-yield bonds aren’t in any serious trouble.

The tendency of U.S. corporations to accumulate cash could also be to blame. Lonski says net corporate debt to GDP, which subtracts total debt levels by the amount of cash in business balance sheets, was at a much more subdued 33.2%, well below the 45.2% seen in the broader debt to GDP measure.

But the meaningfulness of this statistic may be limited by the “high concentration of cash among relatively few companies,” many of which are considered highly creditworthy.

Tech companies like Apple and Microsoft have been the main components of this trend. In the past, such firms issued debt backed by the collateral of their overseas profits for share buybacks and other forms of shareholder remuneration.

So has the correlation between corporate debt and defaults been broken for good or just for now? “Just for now” remains the most likely answer, since the business cycle is embedded in human nature rather than some kind of external constraint that we can evade with clever tricks. In fact, it’s clever tricks – like the fiat currency printing press — that fool us into thinking we control events that used to control us. 

And is it worth speculating about what might happen to restore those historical relationships – that is, cause a crisis that spikes junk bond defaults and causes corporate debt to start shrinking? Probably not, since there are so many candidates right now. Something will happen and the lines on the above chart will converge in the upper right corner – and then the bottom right.

Martin Armstrong reports that Interest Rates are rising significantly in several important European Markets. With Libor at its highest level since 2008 both banks and debtors face rapidly rising rates. He reports it is the beginning of his Monetary Crisis Cycle – R. Zurrer for Money Talks

Extremely reliable sources from Behind the Curtain in Europe are becoming deeply concerned that Draghi at the ECB has created a monumental economic disaster he is just praying to holding off until he leaves next year. Interest rates are already starting to rise significantly in several important money and interbank markets. Both banks and debtors are facing a rapid rise in interest expenditures that will shock the world. This is going to blow-out budgets around the globe and both private and public debtors face higher costs of funds.

The Libor (London Interbank Offered Rate), the most important reference rate for the global interbank market, is currently at its highest level since 2008. We elected a Yearly Bullish Reversal on the close of 2016. Once we see the rate close above 213 on a monthly basis, LIBOR rates will be poised to jump to 510. When the Libor price rises, the short-term borrowing for banks becomes more expensive, and for borrowers in the financial market, such as sellers of bonds or buyers of mortgages, debt service becomes more difficult. The demand for debt is exceptionally high. We are looking at LIBOR rates rising sharply. The dollar-lending rate for dollar loans has been rising steadily in all maturities since about the end of 2014. The dollar-Libor for three-month loans in March 2017 were trading at around 1.1%. Currently, this dollar-Libor rate stands at around 2%.

This year’s WEC will be focused on the next major crisis and how all the markets will interact. This is the beginning of the Monetary Crisis Cycle. Our Yearly Models on LIBOR are already in a bullish posture on both short-term indicators. A closing on an annual basis above 208 will signal rates will rapidly more than DOUBLE into 2020. A closing above 510 on an annual basis will warn of a MAJOR financial crisis hitting just about every economy.

…also from Martin on March 15th:

The Resistance to Change is Why We have Panics

Gary makes the case that US 10yr & 30yr Interest Rates will begin to decline and the Stock Market, especially Tech, will continue to soar – Robert Zurrer for Money Talks:

You thought I was done with the Amigos shtick, did you? Not by a long shot ma’am. They are the happy-go-lucky riders in play as the stock bull market churns on. They are the rising SPX/Gold ratio and stocks in general vs. gold (Amigo #1), rising US 10yr & 30yr yields (Amigo #2) and the flattening 10-2 yield curve (Amigo #3). On their current trends these goofy riders have signaled “a-okay!” to casino patrons playing the stock market and other risk ‘on’ items.

Taking our macro indicators out of order, let’s start with Amigo #2, who we have been noting to be bracing for something…

What is that something? Well, it is the targets for 10yr & 30yr bond yields we laid out 4-5 months ago in a bearish case for bonds; you know, back when everyone didn’t hate bonds as is currently the case under the much more recent expert guidance of Bill, Ray and Paul? It might as well have been Ringo, George and Paul making the call.

Another Heavy Hitter Calls Bond Bear

I am not trying to come off as a contrarian bond bull, deflationist. There are very valid reasons to be open to if not expect a new and secular bond bear market. But with the yields at our targets, which were established for a reason (being caution) and with the financial eggheads fully in unison, it has come time for caution on the bond bear stance and at least some aspects of a stock bull stance.

For my part, as written on several occasions in NFTRH and in public, Treasury bonds (T bills, 1-3yr, 3-7yr & 7-10yr) are now playing a balancing role in my portfolios and spitting out monthly income to boot. Is this an investment? Absolutely not. Not with Treasury bonds overseen by the chronic debtor AKA the US government and manipulated by the chronic inflator, the Federal Reserve.

But the long-term ‘Continuum’ chart has been kind of obvious, don’t you think? While the 10yr has hit target, the 30yr dwells just under its historical limiter (and target) at 3.3% (the monthly EMA 100).

At the same time the long bond, which goes opposite its yield, has come down to its EMA 100, which has historically limited declines. This time different? Maybe. There are no absolutes. But this is a risk vs. reward business.

The bottom line on Amigo #2 is that with the ‘inflation trade’ that got going in December, yields would rise along with the bullish backdrop. But if the limiter once again lives up to its name, that which was most bullish during said ‘inflation trade’ would be at risk. Since the macro moves at a snail’s pace, this is not necessarily bearish yet; but it would demand rotation and rebalancing for right minded casino patrons.

Moving on, let’s see where Amigo #1 is at. He’s the one on the left in the picture above. He’s utterly euphoric, out there riding along the foothills in the warm Mexican sun. Not a care in the world… just look at that goofy, blissful expression on his face. Indeed, despite a hard spill in February the uptrend in SPX vs. Gold is intact and the target of 2.50 is still valid. But this is a maturing situation.

We are watching companion indicators like Gold vs. Palladium, Copper and Industrial Metals for fine tuning as well. One very possible scenario is that the stock bull is not ending but the ‘inflation trade’ of the last several months is. If you get a chance have a look at the GYX/Gold ratio and think about rotation, balance and early warnings.

Last but not least is Amigo #3, the yield curve. He’s pretty much the least noticeable one in the picture. I mean, Martin Short compared to Chevy Chase and Steve Martin? Come on… He may not be as noticeable, but he is sure as hell as important, or even more so.

The daily view appears constructive for a bounce similar to the Q4 2017 bounce.

But on the big picture the curve is still completely in a flattening trend as it flattens with a boom and steepens with economic weakening and eventually, a bust.

Bottom Line

The 2nd Amigo is the only one to have hit target (and even there the 30yr has a little wiggle room) and the others are still in process. Even if interest rates stall here, the market could simply continue to rotate (as it is currently doing as tech gets the 2018 version of a safety bid I assume due to its lack of inflation sensitivity).

The stock market is up trending vs. gold and it may take finer tuned indicators like cyclical metals vs. counter-cyclical gold to give early warnings there. But for now the first Amigo is intact.

The yield curve is probably the least sensitive indicator, but maybe the most important because when it changes trend the chart above instructs that based on years of history, it would be time for everyone to get out of the pool polluted by central bankers’ inflationary policy designed to keep asset markets afloat. It would be time to be very careful about what you own and it would be time to own the counter-cyclical metal and its miners (those of relative quality, anyway). This is antithetical to inflationist gold bugs, but it’s the way it is.

NFTRH.com and Biiwii.com

Martin Armstrong, who has been very accurate on rising interest rates, and he impact they are having on pensions and Europe. He sees another banking crisis coming just as the United States is looking at a new radical bank rescue policy that will effect depositors rather than taxpayers – Robert Zurrer Money Talks 

While the stock market crashed as the pundit looked in their bag to try to come up with an excuse, they blamed rising inflation and interest rates. Yet, nobody is really paying attention to the underlying trend. The cost of carrying debt has been rising gradually and there are noticeable measurable impacts that the pundits are of course oblivious to since they have to explain every day’s movements and not the real trend.

Already, the 10-year rate is piercing above the 2.6% area. There is an impact on the currency once people begin to comprehend the trend. The 10-year German bond rate is 0.70%, and this has been maintained by the ECB buying 40% of European government debt to no avail for nearly 10 years.

The real crisis comes when they realize that the ECB will not be there to buy government debt. The bidders will demand a higher yield so rates will rise very rapidly.

Meanwhile, the Fed will pursue higher interest rates as they need to be normalized to help pensions funds that are rapidly collapsing. This idea of a lower dollar will raise the price of imports and with tariffs, inflation in consumer products will rise.

Mueller is still not ending his investigation. Why should he? He would have to go get a real job in the private sector. Keep the investigation alive to pay the light bills. He shows no sign of embracing unemployment. His pretend indictment is dancing between raindrops, indicting people in Russia knowingly there will never be a trial. We cannot count him out yet as a factor that will undermine the economic confidence.

So we stand at the threshold of rising rates that will then feed into the market and create a bid for the dollar it appears after March.

The Coming Banking Crisis & The End of Bailouts

Behind the curtain, there is a growing concern about a serious banking crisis beginning once again in Europe. Many governments are talking about the crisis behind-the-curtain and we are now beginning to see steps that are being taken to end the TO-BIG-TO-FAIL policies that dominated the 2007-2009 Crash.

The United States is looking at a new radical bank rescue policy where the government is proposing to revise a central pillar of the idea of bailing out banks creating new financial regulation with a new Chapter 14 bankruptcy procedure. They are looking at eliminating the risk of taxpayers’ costs to bail out banks. They are investigating the means for an orderly resolution so that the taxpayers do not have to bail out the banks. This development is causing some concern among the high-flying Wall Street banks, for if that is the case, then another crisis as 2007-2009 will result in even Goldman Sachs closing. The proposal looks to shift the burden to the shareholders and creditors of that bank. This means depositors who are thus creditors.

A must read to discover why Stocks are the biggest risk to pension funds and will trigger the pension crisis sooner for two simple reasons.  Robert Zurrer for Money Talks.  

The “pension crisis” is one of those things – like flying cars and nuclear fusion – that’s always coming but never arrives. But the reason it hasn’t yet happened is also the reason that it will happen, and soon: 

The Risk Pension Funds Can’t Escape

(Wall Street Journal) – Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks.

That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9, according to figures provided by the system.

The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017. It gained back $8.1 billion through last Friday as markets recovered.

“It looks like 2018 is likely to be more turbulent than what we have experienced the last couple of years,” the fund’s chief investment officer, Ted Eliopoulos, told his board last Monday at a public meeting.

Retirement systems that manage money for firefighters, police officers, teachers and other public workers are increasingly reliant on stocks for returns as the bull market nears its ninth year. By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier, according to figures released earlier this month by the Wilshire Trust Universe Comparison Service.

Those average holdings were the highest on a percentage basis since 2010, according to the Wilshire Trust Universe Comparison Service data, and near the 54.6% average these funds held at the end of 2007.

One reason public pensions are so willing to bet on stocks is because of aggressive investment targets designed to fulfill mounting obligations to millions of government workers. The goal of most pension funds is to pay for those future benefits by earning 7% to 8% a year.

“Equities always take up a disproportionate share of the risk budget that any plan has,” said Wilshire Consulting President Andrew Junkin, who advises public pension funds. “You can never get away from it.”

That stance paid off during 2017’s market rally as public pensions had one of their best years of the past decade. They earned 12.4% in the 2017 fiscal year ended June 30, according to Wilshire Trust Universe Comparison Service.

But the risks are sizable losses during market downturns, which then can lead to deeper funding problems. The two largest public pensions in the U.S.—California Public Employees’ Retirement System, known by its abbreviation Calpers, and the California State Teachers’ Retirement System—lost nearly $100 billion in value during the fiscal year ended June 30, 2009. Nearly a decade later, neither fund has enough assets on hand to meet all future obligations to their workers and retirees.

Many funds burned by the 2008-2009 downturn tried to diversify their investment mix. They lowered their holdings of bonds as interest rates dropped and turned to real estate, commodities, hedge funds and private-equity holdings. These so-called alternative investments rose to 26% of holdings at about 150 of the biggest U.S. funds in 2016, according to the Public Plans Database, compared with 7% more than a decade earlier.

At the same time, the amount invested in stocks crept upward as markets roared back—and equities remain the single largest holding among all funds. The $209.1 billion New York State Common Retirement Fund increased its equity holdings to 58.1% as of Dec. 31 as compared with 56% as of June 30. That allocation is now higher than the 54% held as of March 31, 2008.

The $19.9 billion Teachers’ Retirement System of Kentucky now has 62% of its assets in equities, close to the 64% it had in 2007. It sold $303 million in stocks Jan. 19-20 to rebalance its portfolio following gains. From Feb. 6-8, as U.S. markets plunged, the fund bought another $103.5 million of stocks.

“We are definitely a long-term investor and look to volatility as an investing opportunity,” said Beau Barnes, the system’s deputy executive secretary and general counsel.

Calpers had a chance to pull back on stocks in December and decided against it. Directors considered a 34% allocation to equities, down from 50%. They also considered a higher allocation.

In the end, the fund opted to raise its equities target to 50% from 46% as of July 1 and its fixed-income target to 28% from 20%. It had 49.8% of its portfolio in equities as of Oct. 31, according to the fund’s website. That is close to the 51.6% it had in stocks for the fiscal year ended June 30, 2008.

To put the above in historical context: 

Thirty or so years ago, state and local politicians and the leaders of their public employee unions had a shared epiphany: If they offered workers hyper-generous pensions they could buy labor peace without having to grant eye-popping and headline-grabbing wage increases. And if they made unrealistically high assumptions about the returns they could generate on pension plan assets they could keep required contributions nice and low, thus making both workers and taxpayers happy. The result: job security for politicians and union leaders and a false sense of affluence for workers and taxpayers.

This scam worked beautifully for as long as it needed to – which is to say until the architects of the over-generous benefits and unrealistic assumptions retired rich and happy. 

But now the unworkable math is coming to light and pension funds are responding with two strategies: 

1) Roll the dice by loading up on equities – the most volatile asset class available – along with “real estate, commodities, hedge funds and private-equity holdings.”

2) Buy the dips. As the above highlighted quote illustrates, stocks have been going up so steadily for so long that pension fund managers now see “volatility as an investing opportunity.” When the next downturn hits they’ll respond by throwing good money after bad, magnifying their losses.

Eventually a real bear market will shred the duct tape and chewing gum that’s holding the public pension machine together. And several trillion dollars of obligations will migrate from state and local governments to Washington, which is to say taxpayers in general, at a time when federal debts are already soaring.