“The Snowball-Earth theory argues that during one or more ice ages, the entire earth (including areas around equator) were entirely frozen, with the latest episode occurring before the Cambrian explosion of life”, Macquarie’s Viktor Shvets begins, in a March 10 note which, to put it mildly, paints a grim picture of the future barring policy intervention.
Over the past week, I’ve spent plenty of time documenting apparent signs of stress in dollar-funding markets and warning that various cracks are forming in credit.
I’ve endeavored to avoid bombast in my assessments, although objectively speaking, Monday was a harrowing day for some measures of credit stress. CDX.IG, for example, widened the most since Lehman, and as the following scatterplot shows, the move was far more dramatic than even the steepest slide in equities since the crisis would have entailed.
(BBG, h/t Luke Kawa)
That suggests credit is in all kinds of trouble. The moves in junk spreads on Monday are hard to fathom. High yield spreads widened 92bps on the day, the largest single-session jump in percentage terms since September of 2001. That was presaged early on in a six standard deviation move for CDX.HY.
High yield energy spreads ballooned out to 1,422. In addition to being the widest since the depths of the early-2016 oil plunge/deflation scare, the 342bps one-day jump was the largest in percentage terms in recorded history.
(BBG)
As Bloomberg’s James Crombie helpfully points out, the total amount of oil and gas debt trading at distressed levels rose by more than $10 billion on Monday alone (from Friday).
I’m not sure any of that necessarily validates Macquarie’s “Snowball-Earth” scenario, but it does suggest that too many more days like Monday and we’re going to have a set of seriously vexing problems on our hands in credit, something discussed at length last week in “‘The Black Swan Is A Liquidity Crisis’”
After citing blowouts in European Fin spreads, the TED spread and cross-currency basis, Shvets delivers a rather stark warning – and, again, “stark” is an inadequate adjective. To wit, from Macquarie:
The ‘Earth is freezing’ and unless this is reversed, eventually everything will freeze. It is the confluence of COVID-19 panic and growing geopolitical concerns (as Russia, Saudi Arabia & Turkey attempt to redefine global order), that is responsible for such a rapid change of fortunes. Unless we change direction, freezing of extremes in high yield markets will move to better quality issuers, eventually engulfing high-grade. The flow of liquidity will stop, and global economies and asset classes will undergo a reset, with our asset-based world collapsing, and potentially decades of inflated GDP will disappear.
Fortunately, that’s not a foregone conclusion. In order to avert a scenario where we have to call Tugg Speedman, Shvets recommends a mix of aggressive monetary and fiscal measures which, crucially, “must be sufficiently robust to be believable”.
The problem, of course, is that the kind of intervention robust enough to be “believable” was already delivered on the monetary policy side post-crisis, which means that once central banks get back to zero (or, in the case of the ECB and the BoJ, hit the dreaded “reversal rate”) and once everyone has gone the Japan route by expanding the list of purchasable assets to include equities, politicians need to step up to the plate.
“Fiscal policies (à la TARP) are critical, and could be used in healthcare but also to bail out global airlines, hotel groups etc”, Shvets writes, adding that “there is a need to temper down geopolitical pressures”.
On Monday, Shvets summed up the urgency of the situation in another note which carried the following subtitle: “Do we need to wait for Lehman Brothers?”
Hopefully not.
If you invest for yourself or clients watch your risk…..
HY bond market is what? $2T? Cash em out, restart QE, drop interest rates to -1 percent. Should be good for another decade of the music going… oh wait… except for that virus thing… On top of that let’s start up the Yang Dividend retroactive to Jan 1st, provide government funded sick leave for 2 weeks to anyone affected and free Covid19 testing. That might right this ship. I mean if we also just agree buy US oil into the strategic reserve at $50 a barrel indefinitely. What are the odds on this policy response you think?
We spend trillions on wars and homeland security, but no one in the US govt has apparently planned for a biological attack. I can’t buy a mask yet everyone in China seems to be wearing one. It seems odd all the virus spread just after the trade deal with China occurred and China has all the required supplies to deal with it. Makes you go hmmm.
But what we should do is print trillions of dollars and hand them directly to you US population. It really is the only way to weaken the dollar and stimulate global reflation. Trump aside, the US govt is dysfunctional, and should pay reparations to the population for all its misguided and damaging policies. Italy is under quarantine and Trump can’t figure out that flooding the US hospital system with the dying is a bad thing.
Let’s not do virus conspiracy theories. This isn’t the platform for that. There are plenty of sites that traffic in those kind of narratives, but this isn’t one of them.
Why are all the “capitalists” so afraid of creative destruction? The FED going full BOJ and loading up on equities, and temporary nationalization of corporates, including zombies, sounds a lot like socialism by the back door (i.e. for the rich). Bailing out healthcare corporates at a time when both political parties insist Medicare for All is unaffordable and unrealistic will be particularly rich, the final ironic knife in the back.
When you have an economy leveraged to the nth degree, creative destruction becomes rather painful.
Can’t have your cake and eat it, too. Or maybe you can. ‘Merica.
I’m well aware. But avoiding pain is different from solving problems; Actually in this case it is opposed to solving problems. Capitalism without creative destruction and losses is a just a word without meaning. I was in Japan a year and a half ago, and I felt I saw the future–decades of stagnation that is visible everywhere. There was little contemporary culture or activity. About the only thing new around was WeWork, and I laughed because it stuck out like a sore thumb and I was already convinced at that point it was just a scam.
If only…if only we had taken our medicine at Christmas, 2018 – that market was making an honest effort at kicking the habit, had made it through the worst of the withdrawals and was close to being a price-discovery marketplace once again (as opposed to a political transfer payment mechanism, designed to give currently-alive people “retirement” at the expense of people not yet born, who don’t vote…). Instead, we got the pivot, 24 more wasted months of zero returns, massive additional leverage/buybacks, malinvestment, etc. There is no hope of getting off the pipe now, not in my lifetime…unless…unless the Black Swan really flaps her wings a few times. If corona really goes viral and does what God/Nature designed it for, we get a good/hard clean-out – weak firms with bad ideas fold when the string-pushers can’t save them, we get an unpleasant but productive lowering of the mean age of various national populations, reducing retiree/worker ratios and trimming chronic healthcare expenses. Like the guy says in Jurassic Park: “nature finds a way…”