Thursday, June 11, 2020

Morning Note: Much Left to Play Out

Asian equities (save for China, down moderately) got crushed overnight. Europe this morning is deeply in the red across the board. U.S. equity futures are pointing to a bloody session (at least at the open) as well. 

The VIX (S&P 500 Volatility Index) is up a whopping 16.25%. 

Oil's down 7%, gold's up 1%, silver's up 1.5% and copper's down 1.3%. Ag commodities, save for rice and milk, are down notably as well.

Bonds, virtually the world over, are rallying this morning (yields lower).

I.e., no ambiguity in asset prices this morning. It's risk-off for the moment.

Now, anybody who would be at all shocked by a decent-sized down day right here -- or at anytime in this environment for that matter -- is as disconnected from economic reality as has been the stock market itself of late.

Question is, will this dip be aggressively bought as well? And, if so, when? 

Well, if you're not shocked by this morning's action, and, thus, you're not disconnected from economic reality, frankly, you're not worried about it. Sure, your portfolio of securities will feel it (if the dip's not "aggressively bought" this morning), but you've planned accordingly. Meaning, you're well diversified, and, ideally, you've hedged yourself against disaster.

While the whole world hangs on every central bankers' and politicians' word, and, thus, the market moves accordingly, we remain focused on the long-term stuff that matters; the data, and the debt mess that we began addressing herein well over a year ago. A mess that ultimately cannot be cleaned up by money printing and government borrowing. See the definition of "Balance Sheet Recession" in last night's post.

Here's from this morning's Bloomberg article titled Brawls Erupt in U.S. Debt Markets After Borrowers Get Desperate:  Emphasis mine...
"A massive wave of corporate distress is pitting beleaguered companies against their lenders in brawls that are shaping up to be nastier than ever before."

"As the gloves come off, industry veterans say tensions are as high as they’ve ever seen. 
“You have more and more aggressive people holding this stuff and private equity firms have gamed every nook of credit agreements,” said Dan Zwirn, chief executive officer of Arena Investors, which manages $1.4 billion. “As people get desperate,
there are going to be a lot more of these.”"
"The conflicts underscore how the legacy of the last crisis is being felt as the current one unfolds. The Federal Reserve’s relentless interest-rate cutting and quantitative easing spurred a surge in demand for higher-yielding assets, helping risky companies sell debt with fewer lender safeguards. Now, amid a fresh bout of economic pain, the effects of those policies are coming to bear."

"“Anyone professing to be shocked by it probably hasn’t been around very long,” said Philip Brendel a senior credit analyst at Bloomberg Intelligence."

"“Rates were suppressed long after they should have been; it drove yield hunger and a non-bank explosion that created misalignments,” Arena Investors’ Zwirn said.
“Now they’re learning once again, there are consequences. We are at just the beginning of this thing. They’re going to fight like dogs to avoid those consequences.”"
Again, "The Federal Reserve’s relentless interest-rate cutting and quantitative easing spurred a surge in demand for higher-yielding assets, helping risky companies sell debt with fewer lender safeguards. Now, amid a fresh bout of economic pain, the effects of those policies are coming to bear.

And guess what, as I've stressed herein ad nauseam for weeks, the Fed is now doubling, tripling, quadrupling, quintupling, well, let's just say that they're dispensing with any and all limitations on the very process that essentially got us into this mess to begin with. 

Markets love unlimited money printing, until, that is, the economic consequences of a debt-filled bubble come home to roost.

There's much left to play out this go-round...

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