From Doug Noland at creditbubblebulletin.blogspot.com:
Global markets have found themselves again at the precipice. My sense is that everyone’s numb – literally dazed and confused from prolonged Monetary Disorder and the resulting perverted market backdrop. Repeatedly, “The Precipice” has signaled easy-money buying and trading opportunities. Again and again, selling, shorting and hedging at “The Precipice” guaranteed you were to soon look (and feel) like an absolute moron – for some, progressively poorer dunces the Bubble was pushing yet another step closer to serious dilemmas (financial, professional, personal and otherwise). A focus on risk became irrational. Fixation on seeking potential market rewards turned all-encompassing.
All of this will prove a challenge to explain to future generations. Keynes: “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” And paraphrasing the great Charles Kindleberger: Nothing causes as much angst as to see your neighbor (associate or competitor) get rich. In short, Bubbles are all powerful.
Going back to those darks days in late-2008, global policymakers have been determined to not let the markets down. Along the way they made things too easy. “Do whatever it takes!” “Shock and Awe!” “Ready to push back against a market tightening of financial conditions.” “Do what we must to raise inflation as quickly as possible.” Historic market excess and distortions were incentivized and, predictably, things ran amuck. “QE infinity.” Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to “perpetual money machine” quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened.
It was a week of ominous developments among multiple key flashpoints. Let’s start with commodities and EM, where the accelerating downward spiral is now rapidly reaching the status of “unmitigated disaster.” In a destabilizing crisis of confidence, panic outflows saw the South African rand sink 10% to an all-time low. Local South African bond Yields jumped 140 bps in two sessions to about 9% (from WSJ). The Turkish lira dropped another 3%, as Turkey’s equities were slammed for 5%. The Russian ruble dropped 3.4%. The Brazilian real declined 3.2%. Despite repeated central bank interventions, the Mexican peso sank 4.4% this week to a record low. Also hurt by collapsing crude, the Colombian peso dropped 4% to a new low.
Crude (WTI) sank 12% this week to the lowest level since the 2008 crisis. The Bloomberg Commodities Index sank to fresh 16-year lows. Natural gas dropped 9%, to lows since 2012. Iron ore was down 4% this week to a record low (going back to 2009). Iron ore prices have collapsed almost 50% this year. Crude prices are down about 35%. For highly leveraged operators throughout the commodities arena, the situation has quickly turned desperate. In the financial realm, the yen jumped 1.7% and the euro gained another 1% against the dollar this week, pressuring the leveraged “carry trade” crowd.
It has rather quickly become equally desperate for financial operators holding risky corporate debt in a marketplace that has turned illiquid and increasingly dislocated. For the first time since the 2008 crisis, a public mutual fund (Third Avenue) this week halted redemptions. A Credit hedge fund (Stone Lion Capital) also halted redemptions. The concept of “Moneyness of Risk Assets” has been integral to my “global government finance Bubble” thesis. Monetary policy coupled with aggressive risk intermediation (certainly including fund structures and derivatives) created the market perception that high-yield corporate debt could be held with minimal risk (price and liquidity). With the Credit cycle turning, this misperception is being exposed. Junk bond fund redemptions jumped to $3.5 billion this week. The halcyon notion of turning illiquid securities into perceived liquid instruments is coming home to roost. Credit spreads widened significantly this week. Ominous as well, bank stocks sank 6.2%, and the Broker/Dealers were slammed 7.5%.
To continue reading: The Precipice
