Gratuitous Advertising Blurb:
“I've been a subscriber for a while now. I was just on a trip and caught up on the last three posts I missed. It reminded me that this is one of my favorite Substacks. You do such an excellent job of bringing the insanity of what's going on without being a Debbie Downer--though we should be probably be terrified and furious. I laughed out loud at the final tv quote. Keep on keepin on!”
Thank you!
"Accepting the absurdity of everything around us is one step, a necessary experience: it should not become a dead end. It arouses a revolt that can become fruitful."
"I'm constantly shocked at how long CNBC can exist.
I mean, it's doubled Seinfeld's run as a comedy."
I hear McCullough mention his “quads” (as opposed to Geithner’s abs1) often, and as I’m not a subscriber, I wasn’t sure what they all meant, so for reference (I think he thinks we’re heading into or in Quad 3), here it is:
“All Roads Lead To Inflation…I own zero fixed-income.”
- Paul Tudor Jones (I apologize for posting an Andrew Ross Sorkin clip)
I have a huge backlog of potential things to post, but will save those for next time, to avoid overwhelming everyone. A few telling charts, and some great insights below, from the likes of Rick Santelli, The Credit Strategist, Peter Boockvar, Jim Rogers, David Murrin, and especially David Dredge. If you only listen to one thing this week, listen to this. If you can’t, I’ve annotated his interview below with some succinct clips.
Godspeed.
Speaking of CNBC, I’ve always kinda liked Rick Santelli (some do not, and that’s OK). Here he is Tuesday on Debt Financing:
Average Weekly Hours of Production and Nonsupervisory Employees, Total Private
The Credit Strategist
“Corporate bond spreads are now at their tightest levels in 20 years. Investment grade spreads are currently 83 basis points (the narrowest since March 2005) while high yield bond spreads are 280 basis points (the narrowest since mid-2007 - shortly before the market collapsed).
Spreads measure the extra compensation over “riskless” Treasuries demanded by bond investors for purchasing corporate bonds. They are supposed to be a measure of risk but today’s spreads suggest that few if any bond investors even think about risk as they shove money out the door as quickly as possible…
Why are spreads so low today? There are several reasons. First, there is far too much money in the system chasing paper. Excess liquidity leads to excessive complacency. We’ve seen this before and we’re seeing it again. Second, the Fed is easing policy which provides a strong tailwind to investment grade bonds and a lesser but still meaningful one to high yield bonds, especially higher rated ones (BB/B+) that comprise the largest share of the market. Third, the private equity/private credit funds that dominate corporate credit markets don’t accurately or timely mark-to-market their assets because most of their assets do not trade publicly or actively. As a result high yield bond prices are significantly inflated which translates into tighter spreads. In other words, reported high yield bond spreads are tighter because we aren’t really talking about publicly-traded asset classes anymore. Even the public high yield bond markets behave like quasi-private markets which distorts their numbers.
Nobody should be buying either investment grade bonds or high yield bonds at their current spreads unless mandated to do so. Trees don’t grow to the sky and spreads don’t shrink to zero. It is a near certainty that spreads will widen (even if they narrow further temporarily) as bond markets are forced to deal with growing corporate and government debt burdens that will suppress economic growth.”
Anecdote from the great Peter Boockvar:
“On private credit, this was an interesting Q&A in the Fifth Third Bank conference call on Friday, "are you seeing any competition from non-bank, direct lenders, private credit that looks different today than it would have 3, 4, 5 years ago?
The answer from the CEO, "we do see it at the margins, principally in the leveraged lending space. What I would tell you has happened is their focus on less structure, faster execution that has a little bit of a bleed over in other areas. And there is no question that things that some of the private lenders are willing to do are not in line with the way that we want to run our portfolio. I think it was the Financial Times, the Journal, but there was a piece about a week ago in the paper that talked about 'payment in kind' or where I come from, negative amortization lending, was between a quarter and a third of the portfolios at most of the major private credit shops. That is definitely not something you would ever see at Fifth Third in an environment where the economic backdrop is benign and where you don't have a large percentage of your companies operating at distressed levels. It's just odd to see that amount of PIK lending going on. So if they're willing to do those things and we're not, by definition, they're going to scrape the most indebted companies out of the banking sector."“
I’ve mentioned the PIK trend a few times lately…
Chobani shows investors will eat historic levels of credit risk
“Last week Chobani, known for its thick Mediterranean yoghurt, sold $650mn of new CCC+ rated junk bonds. The money was not for an acquisition or to fund new investment. Rather, It was a so-called dividend recap where the money paid off preferred stock held by a single investor, Healthcare of Ontario Pension Plan.
The notes would have cost perhaps 15 to 18 per cent a year or two ago. Chobani instead sold them with a cash coupon of just 8.75 per cent (the company can also elect to pay bondholders with more debt, instead of cash, at a slightly higher rate).”
2007/2008 Timeline
Here’s my annotated 2007-2008 rate-cut cycle graphic:
RE: A.I. Valuations (Grant’s)
"Nothing stops this train: WSJ reports that search firm Perplexity is in negotiations for $500 million in fresh capital at a valuation of $8 billion or more, up from a $3 billion figure as of this summer and $520 million in January..."
Looking at this poster’s history, he seems legit.
Fastest and Slowest Selling Metros in September 2024
Jim Rogers
“Human beings are still the same. We've always been human beings, we always want the easy way, we always want the free lunch. Don't worry, I want the free lunch too, we all do, but the free lunch has consequences. It always has, but that doesn't mean they won't try it”
“In times of huge crisis, the world always returns to gold, and we probably will again, but there's not enough gold to take care of the whole world, unless gold goes to $30,000 or something.”
“The way this has worked out in history usually is the debt gets higher and higher, until the country has a serious debt problem, and then they come in with exchange controls…”
David Murrin on 21st-Century Trade With China
“Our capitalists made lots of money and they knew full well what they were doing by stripping our IP and deindustrializing our world and industrializing their world. They started off by doing it because their labor was cheap, and they subsequently use that money to build automated factories that outstrip us and now provide the basis of an arms race we can’t really match. That was a plan. And we, the greedy, liberal west, walked right into it. And anyone who made money from the Chinese through that 20 year period should not live with themselves because they mortgaged and sold the future of the West…”
On Leverage
“…as we go into decline, all systems stop being productive in real terms. So real productive measures drop. So real GDP declines. Some bright spark turns around and says, oh, well hang on. Real growth has gone from four to two, but if I double the leverage, I’ll get up to four and then I’ll get reelected. So then they do the next one. By the end, we’re 40 times leveraged with 0.1% growth to get what looks like 4% growth. So the big question of our time, find me an economist who can tell me what the real unleveraged growth of America is, and people will have an epileptic fit even thinking about it because it’s teeny. But what socially happens is, say for example, you’ve got a country, and you are managing the economics of your country badly. Money printing allows you to look like you’re doing a good job.”
“Money printing has guaranteed the linearity of our political structure, our military, our businesses, it’s everywhere. And that is the greatest danger of money printing, it’s not just the leverage and the shock when you have to take the leverage out, it’s actually the social consequences of literally 20 years of linearity”
David Murrin
David Dredge
“The Sharpe ratio is a nonsensical risk measure and and very, very badly utilized in the industry”
“Another Nassim [Taleb] saying - if you're buying an option for a reason, don't do it, because it's probably priced correctly. There's only one reason to buy an option: because the price is right.”
“Weather forecasters, also known as economists…”
“I've been saying forever that Japan will be the trigger. Japan after three decades of one of the greatest market manipulations in the history of the world - zero interest rates, QE on a scale that dwarfs anybody else. When they stop and go the other way, that has shock effects that are hard to fathom, in the realm of chaos theory.”
“in reality, their risk is their correlation assumptions, but they don't measure that”
“They [the Federal Reserve] look stupid for creating something called average
inflation targeting, just before inflation explodes higher, and they said we're going to let it run hot, and then of course when they let it run hot it becomes highly reflexive, and they call it transitory, and they end up looking dumb, so they do what they do, and they get away with it”
“The problem of what has become commonly talked about in terms of the fiscal dominance situation that the governments have put all of the central banks in by basically relinquishing any independence they supposedly had, by running debt beyond 100% of debt to GDP, where their ability to continue funding at interest rates that may or may not be necessary to suppress inflation raises questions of the central bank's freedom and flexibility to do what they would need
to do”
As Fed Chair: “I would start breaking up the big banks, and I would force a lot
more capital into the banks, and I would start a drive to reimpose Glass-Steagall”
“nothing surprises me because I don't have any expectations of the future”
“I don't think higher interest rates hurt economies the way we're told it does. I think most economies function pretty well at higher interest rates”
“The biggest borrower at these now higher rates is the government. Janet Yellen shows you she doesn't mind borrowing short at the highest point in the yield curve - she's happy to do it. She's not going of business. Her negative cash flow isn't driving her to the poor house. She doesn't care. She's happy to issue more 5% bills over and over and over and over again. If a corporation had her funding structure, they'd probably be in a bit of trouble, but she's not in trouble. She's the biggest borrower, and the Fed was the biggest owner, so they have the biggest unrealized loss, and their - you know, I don't want to use the word - Ponzi scheme just carries on”
“I saw some note from somebody - you know, well, now that inflation is sustainably below three, the Fed should normalize interest rates - as though normal is the environment we've had post GFC, which in fact is the greatest anomaly in all of interest rate history”
David Dredge on the “Greenspan Put,” “the wealth effect” (aka “trickle-down), and the Cantillon Effect:
“People say, well, there's going to be a recession because of this, and therefore markets will go down, but my argument is that the purpose, in the sense of the Greenspan Put era, and to a great extent which evolved into inflation-targeting, was to - actually Greenspan said this a breakfast I was at once, after he'd retired - was to sort of break the dichotomy between their dual mandate - that you could drive growth through the wealth effect of asset inflation, and then not measure assets in your measure of price stability, and you could then do both, and if you think about really what's happened during the sort of low-volatility of inflation era, that's exactly what was going on the monetary policy.
Low interest rates and QE was very much an asset inflation driven activity - until the government joined in, with the huge fiscal stimulus around the world in Covid - it didn't generate the CPI price inflation that they had defined as their price stability, or what they call inflation measure, and so much of that wealth-effect drives economic activity - because the people who dominate that wealth also dominate consumption, because they've got the dollars to spend.
Economies that all logic says - oh, this economy should be slowing down, or, you know, raising interest rates 500 basis points should slow the economy down - it doesn't happen because the wealth effect of continued inflated asset prices and and greater income from those who own the majority of wealth of higher interest rates keeps the economy chugging around. So the economy will go down when asset prices go down, not the other way around, and that wealth effect which fuels the economy, also drives the wealth segregation, as the rich get richer, because they own all the assets. That leads to the political and geopolitical instability and fragility in the system, and that's sort of - I don't know, that's a bit of an aside - I know we weren't really talking about that, but that's increasingly how I sort of see the world. That fragility in the world, as governments and central banks have have created all this credit - true inflation - money and credit that has propped up these asset prices, and the wealth of the, you know, top quartile of the world.”
As an aside, Harley Bassman opines:
Uncapitalized Risk: “They know the losses are there, they're just not being accounted for.”
“There's a few things that we can still see in the market, where we can still see uncapitalized risk, so in a sense, what we're looking for is that uncapitalized risk Now obviously the sort of mother of all uncapitalized risks in the system everybody knows about, because they know the losses are there, they're just not being accounted for. So that's in duration, supposedly riskless government bonds. I mean everybody knows that. I don't know where it is now, but last year Bank of America had $138 billion of unrealized losses in their hold to to maturity US Treasury portfolio.
Everybody knows that the Fed has a trillion dollar loss. Everybody knows that pension funds have massive, unrecognized losses in Europe, in insurance companies in Taiwan. So you can see that in terms of the vol markets in our books, that there's still significant exposure in the system to long-end interest rates, and to government debt in general. Now whether that risk is because of rising interest rates, again, arguably maybe that's the risk in the US Treasury Market, or to credit - remember Basel decided to treat all OECD sovereign bonds as zero risk assets, so you have the particular issue in Europe.
I would argue the risk is greater in Europe, because no matter who you are in Europe, in the Euro Zone, your bonds across the Euro Zone get treated as zero-risk rated assets. You see the problem previously was Italy, but now is very much France, where there's no capital protecting not just the interest rate risk of those holdings and hold to maturity books, but also the credit risk, so if the market wants to price credit risk into French bonds or Italian bonds or Greece bonds, it's immediately a problem, because there's no capital supporting that risk. Now it doesn't metastasize because they don't have to account for it. They could just say it's unrealized losses, and they'll continue to be underwritten by their governments, and funded by their respective central banks, so that's still a big deal.
This is why I've been saying for a long time now that central banks will keep the curve inverted until they get to the recession, because if they let the curve un-invert, and they lose control of the back end, it's a big problem. Again, the Fed cutting 50 basis points - you see the immediate risk of steepening in the back end. It’s a problem, and that will continue to be a problem.”
"I don't see any plan coming from anywhere other than more debt...asset inflation seems to me their only solution"
”The solution never has been, and still is not, owning things with bounded upside that don't provide downside protection, and obviously the biggest one of those is bonds.
Owning government bonds as though it has some sort of portfolio benefit - when the guy selling them to you has a stated policy of trying to debase his own debt - it doesn't strike me that's going to provide a good retirement 20, 30, 40 years down the road”
Just throwin’ this out there. Please, no hate mail.
It’s from a Youtube conversation with Elliott Wave’s Steven Hochberg and Peter Kendall and Yra Harris…
From a passage in Andrew Ross Sorkin’s slavish book, “Too Big To Fail”: “Geithner, with his six-pack abs, had a game that matched his policy-making prowess. “Tim’s controlled, consistent, with very good ground strokes,” Lee Sachs, a former Treasury official, said.” Barf.
Great write as so often.
But I have a potentially stupid question: why does everyone think that spreads are low because high yield risk is undervalued / ignored?
What if it is the opposite: UST are no longer considered risk less since the downgrade a few years ago, the loss on book from the yield shock and going into this years presidential election and hence the spread gets smaller because UST are considered riskier, more volatile?
Doesn’t the FED have a magical army of hundreds of overpaid Econ PhD that can make everyone happen in parallel just like they did in 2007-2009?
No I think you are probably right regarding FED and Yelllen and that’s why I can’t shake of the suspicion that the treasuries are considered higher risk but thanks to US regulation considered as good as **** for leverage stacking to ‘hedge the risk’
If they were to really do that, 1929 could look like a walk in the park as that would put unsurmountable pressure and risk on the over 2 quadrillion of derivates when the dominos start to fall …