Wednesday, October 30, 2019

Quick Fed-Meeting Followup and Bonus Quote of the Day

The market, after a bit of hemming and hawing, traded higher on this "Fed day". You might think it was the quarter-point rate cut that did the trick, but of course we knew that was coming, and the market actually traded lower on the announcement itself. What traders saw as a green light to buy was Powell's comment that there'll be no rate increases until inflation rises "significantly".

Fascinating! The last thing on anybody's radar right here is a rate hike. I guess the notion that the Fed has no stomach for upsetting markets by getting in front of a bout of inflation essentially signals to traders that asset prices can go, or blow (if you're in the bubble camp) to the moon without the Fed remotely standing in their way. Hmm...

Here, in my view, is the thing: The Fed absolutely can't raise interest rates under present bond market circumstances without setting off one hellacious firestorm that'll burn right through the stock market (not to mention the economy) as well, and I suspect they know it.

While I've expressed ad nauseam for months my concerns with what lies beneath, let's hear it from the horse's mouth. 

Here's bond rater Moody's synopsis of their own latest research report:   emphasis mine...
"New York, October 29, 2019 -- Investors have maintained a voracious appetite for high-yield debt this year, fueled by post-financial crisis quantitative easing, Moody's Investors Service says in a new report. This has led to high-yield bond and leveraged loan volumes at historical highs, paving the way for unprecedented weakness in companies' capital structures and erosion of their credit quality."

"According to Moody's analysts, investors will enter the next downturn more poorly positioned. Aggressive transactions and behavior have seen credit quality continue to deteriorate, with the percentage of first-time debt issuers rated B3 at about 40% today, or twice the percentage seen during the 2008-09 recession, adds Padgett. And as this cohort of companies contends with rating downgrades during the next downturn, the ranks of Caa issuers and defaults could also swell beyond 2008-09 levels."
Make no mistake, ultimately returning to some semblance of normalcy is going to be a painful experience...

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