Tuesday, April 14, 2020

The Great "Shadow-Banking" Crisis

Massive loan loss provisions -- JPMorgan today -- notwithstanding, the current crisis is not likely to be in retrospect deemed a banking crisis. However "shadow-banking crisis" may ultimately fit the bill...

Sunday's Financial Times featured an article titled Coronavirus: is investment management the weak link?

FT points out that at the peak of the 2008 crisis, the non-bank finance sector -- ranging from traditional pension funds, insurers and mutual funds, to hedge funds and private equity -- controlled assets worth $98 trillion. Well, now we're talking $180 trillion, and that's 20% more than overall banking assets.

And while regulators forced a lot of strengthening onto bank balance sheets since then, not so much in the "non-bank" sector.

Of course the Fed, as of last Thursday, stepped knee-deep into those waters and provided some serious relief for markets. However, while announcing that they'll be buying up the bonds of fallen angels (companies whose debt ratings just dipped into junk) as well junk bond ETFs, that still leaves the lowest credit tranches and leveraged loans (and there's a mountain of both) left to fend for themselves. 

Bottom line: While the fed may ultimately go in neck-deep and bailout every risk-taker under the sun, for now there remains much to play out in the credit, as well as the equity, markets against the backdrop of what is certain to become the greatest recession in modern history... 

Speaking of equity markets, macro commentator Ed Harrison, in today's issue of his Credit Writedowns newsletter shares my present view. 
"I see the policy action to date as having been largely successfully in restoring liquidity to funding markets and in propping up risk assets as a result. And so, despite the dreadful economic data, shares have rallied. High yield has rallied too. But, we are fast approaching the time when beating expectations will matter. And so, we will have to see how deep and how long this recession turns out to be.
I anticipate at least another leg down, with the S&P 500 eventually testing its lows just under 2200. If the economic data are bad and the coronavirus news cycle about a second wave is bad, we will break through that level. And it's not clear to me where support levels are from there. If the data are better than expected, this relief rally has legs. We are just hitting only about a 50% retracement of the down move. Let's see where we go next."

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