Credit. Credit. Credit.
Market Roundup
That’s where the action is these days (and really, where it has been for the last year). And I’m here to tell you the credit markets look to be pointing toward an increasing chance of a Lehman-style crisis.
Hyperbole? Hardly! Take a look at this chart, which shows the cost of insuring against a default on some of the bonds issued by Deutsche Bank (DB) …
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| The cost of insuring Deutsche Bank debt. |
You can see the cost of credit-default-swap protection is exploding. So-called “CDS” contracts act like insurance against bond defaults, and the cost of that insurance surges when investors grow increasingly worried about the ability of a government or corporation to make good on its financial obligations. These are the kinds of moves we’ve only seen twice in the last decade — during the 2007-09 credit crisis and the PIIGS (Portugal, Ireland, Italy, Greece, Spain) debt crisis in 2011-12.
And it sure as heck isn’t just Deutsche Bank. CDS costs are jumping across the board here in the U.S., over in Asia and elsewhere in Europe. It’s just a question of degree. Investment-grade credit spreads are now also widening notably, following in the footsteps of the junk-bond market. Spreads there began blowing out several months ago.
Japanese stocks also plunged more than 5% overnight, the worst decline since June 2013. So many investors are dog-piling into government bonds for safety that more than $7 trillion in sovereign securities are now trading at negative yields. Plus, my personal “Look Out Below” indicator that I wrote about Friday is flashing bright red.
Last but not least: Things are getting so bad that Deutsche Bank had to issue a statement late yesterday saying it can make certain debt payments in the coming two years. That was followed up by a memo to employees today in which co-CEO John Cryan claimed the bank was “rock-solid.” The mere fact the company felt compelled to say things are just peachy tells you they could be anything but.
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| Are we headed there again? |
Me? I am so glad that you’re a reader of Money and Markets (and hopefully a reader of my Safe Money Report, too). I say that because you received early warnings about all of these problems 2,000 Dow points ago, and were given step-by-step guidance on what to do to prepare your portfolio for the carnage we’re seeing now.
But what if you didn’t act yet? And more importantly, what do I see happening next? I’ll be the first to admit markets are oversold in the short term. We could easily see a bounce at any time, particularly if Federal Reserve Chairman Janet Yellen throws the bulls a bone in her Congressional testimony tomorrow.
At the same time, it’s abundantly clear to me that central bankers have lost whatever control of the markets they once had. Investors are taking matters into their own hands because they can see the global economy slumping – and they know the bankers are rapidly running out of bullets.
| “Widespread adoption of negative interest rates is making things worse.” |
If anything, the increasingly widespread adoption of negative interest rates is making things worse not better. I say that because bank stocks plunged further in Europe and Japan, and credit-market stress rose further, AFTER central banks there cut rates into negative territory.
So I’m advising you … urgently … to follow the bear market playbook I partially shared in September. It’s not too late to protect yourself, nor is it too late to target profits from downside moves in vulnerable stocks.
Do you agree? Are we still early in this bear market process, or are stocks about to reverse course and surge higher? What do you think about the problems at Deutsche Bank and other large financial firms? Is this Lehman Brothers all over again, or are markets panicking unnecessarily? Hit up the comment section and let me and your fellow investors know what you’re thinking.
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As for the FANG Stocks, many of you weighed in on them after my column yesterday.
Reader Chuck B. said: “Now that the stocks of FANGs and their brethren are starting to collapse, they are going to find it harder to get the loans that have propped up most of them. In fact, nearly all companies are going to have to learn to survive more on earnings – even as earnings may decline. That doesn’t bode well for the markets for some years to come.”
Reader Mike C. added: “The ‘momentum’ play in stocks appears to be dying an agonizing death. When you think about it, the momentum play was akin to jumping on a train for a free ride, and then simply jumping off when it reached your destination.
“Well today, the train has not only picked up speed, but it is no longer a nice evenly-paced trip until you get to your goal destination. It is now switching tracks unexpectedly, and you are no longer heading toward your original destination. Smart thinkers and smart money will eventually figure out that the ‘free train ride’ strategy has run its course, and a new strategy in needed.”
Finally, Reader Donald L. said: “Agree completely about overvaluation. For the past three years, it has been clear that earnings increases did not support an average market price-to-earnings ratio of 16-plus. There is plenty of blame to go around. But until the earnings situation improves, the market will stagnate or worse.”
Reader Nate N. pointed out that FANG stocks aren’t the market’s only problem. His take: “I’m more concerned about the speculative derivatives market where the big banks are playing Russian roulette with bets they can’t cover when the derivative market implodes. They are betting trillions more than they can ever back up, hoping the feds will come to their rescue. Not this time.”
Speaking of someone coming to the rescue, Reader Anthony G. said central banks are tapped out and won’t be able to plug the holes again in this potential credit crisis. His view: “The systemic risk is extreme. The banks in Europe and government debt are outrageous. The Draghi bluff is about to be called. We will soon see if there is enough ammunition left in his tool box.”
Thanks for sharing your perspectives. I’ve been pointing out cracks behind the scenes in the credit markets for more than a year now – and we’re clearly seeing those problems spill over into stocks now. This is just like what happened during the last two major credit-cycle turns and bear markets. That means protective action isn’t just prudent, it’s absolutely necessary.
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The global petroleum glut is getting worse, according to the International Energy Agency. The advisory group said OPEC members dumped another 280,000 barrels per day on an already oversupplied market in January, with production increasing in Iran, Saudi Arabia, and Iraq. That should keep downward pressure on prices for the foreseeable future.
It’s not just European bank debt that’s getting hammered. Yields on peripheral European countries are rising again, with Portuguese 10-year yields hitting a 15-month high. Borrowing costs in other “PIIGS” countries are also rising, while Greece’s benchmark stock index just fell to its lowest level since 1990.
Things got dicey in Hong Kong overnight after police tried to clear food vendors from an area in the city, prompting rioters to throw bricks and bottles and attack police. This week is packed with celebrations to mark the Chinese New Year in Hong Kong and mainland China.
Today is the New Hampshire primary, with voters likely to hand Donald Trump and Bernie Sanders the Republican and Democratic nods, according to polls. But New Hampshire’s voting rules and lousy weather in the region could lead to some surprises when results are released this evening.
What do you think of the latest oil glut news? How about the renewed chaos in Europe’s sovereign-debt market? Are you expecting any surprises in the New Hampshire primary, and if so, what will they be? Let me know in the comment section here.
Until next time,
Mike Larson
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Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Hi Mike
An article showing the exposures to European debt by various banks could be useful. I understand that renegotiations with the Greek Govt. are stalling on their bailout packages. How high are the exposures to this possible fallout?
Mike it would be interesting to see exposures of all the PIIGS banks in relation to GDP of those countries.
An interesting item I saw today – not too germane to Mikes topics, but something to think about: Military spending is now 24% of our GDP, and we spend 34% of all the military expense of the entire world. We have not gotten very much return on that investment in recent years, either. It was pointed out that when the Roman Empire ceased getting much return on what it spent for it’s armies, it began the decline that ended in it’s fall. Will we follow a similar pattern? Can China or Russia become dominant in the world? Or maybe the Caliphate? God forbid!
Correction: That’s 2.4% of GDP. But you’re right about not getting much for it when an F-35 costs $185M per copy and require 45 hours of maintenance per one hour of flight time.
I guess some of this depends on how you count it. Googled it: $600 Billion on total budget of $3.3 Trillion in 16. Computes to about 18%.
On a total of budget basis, correct. Based on a $19T GDP works out to about 2.4%.
money spent in one year vs total budget for the same year is the correct way to look at it
In 1961 John Kennedy’s budget was $102 billion; $50 billion was for military. The Federal government ran on $52 billion; there was a $2 billion deficit that year. If those figures are extrapolated to 2016, adjusted for inflation (800%) and population growth (about 80%), the budget should be $1.47 trillion. We should running a $1.5 trillion surplus. The military budget would be $720 billion.
THE MONEY WENT FOR WELFARE; BREEDING DEPENDENCY, LIKE 12 MILLION ON SS DISABILITY, MOST OF THEM GAMING THE SYSTEM.
John Kennedy was the last patriotic democrat, and the last democrat I voted for (I was 25 at the time).
We went so far off the tracks after the JFK assassination. He tried to end the Cold War, reign in the Fed, and cut taxes and regulations. Instead we got Vietnam War, the Welfare State, and the end of honest money. We have bankrupted the country as a result, morally and financially.
Your percentages are right on the money as is your dollar values. Today the percentages are about the same with a little lower going to the Defense budget. So what if different is the inflated costs that is due to inflation over the past 54 years. It is called inflation which actually tells us our dollar value with what we spend is relative, but our debt is never balanced. The entire economic system is totally out of wack because of the global government’s bailing out failing financial institutions and screwing with inflation and deflation (negative inflation). America needs to look out for itself and not the rest of the world. We spend the most, we buy the most, and we have the most debt to our own people and the rest of the world.
Military spending, Chuck, isn’t an investment. It’s a cost. You pay the cost in money, to avoid paying the cost in blood, if war happens. A major problem for the US is the rising influence of crypto-Marxist “neo-conservatives”, or Neocons. The Neocons take the view that the US should create a global empire and tax the world, to pay off the US National Debt.
To make themselves seem less crooked, Neocons conceal this agenda with rhetoric, about “spreading freedom” abroad.
Forcing other nations to become free, is a metaphysical impossibility…no one, who is being forced, is ever free. But far be it from any Neocon to allow this thought entry into his cranium. Neocons never met a war they didn’t like.
Wars kill people and consume resources.
Nuclear wars consume vastly more wealth than there ever existed, to be stolen,..there’ve been no nuclear wars since Nagasaki got burnt to the ground, because it became abundantly clear that no booty could survive nuclear destruction and enrich the victorious survivors.
A step back from the precipice of world War, would be an international ban on deficit spending by governments.
The historic roots of deficit spending, were that kings borrowed money from lenders, used the funds to equip armies and navies, went to war, stole something in the fight, and sold it to get money to pay their debts.
A world that genuinely limits all governments from launching wars of aggression, should recognize the moral hazard of a debt that can only be repaid, by invading another nation.
Sounds like George Washington penned this! Bravo! Ron Paul sounds close as well……But, alas, the sound of reason and truth will go unheard……
Military spending, Chuck, isn’t an investment. It’s a cost. You pay the cost in money, to avoid paying the cost in blood, if war happens. A major problem for the US is the rising influence of crypto-Marxist “neo-conservatives”, or Neocons. The Neocons take the view that the US should create a global empire and tax the world, to pay off the US National Debt.
To make themselves seem less crooked, Neocons conceal this agenda with rhetoric, about “spreading freedom” abroad.
Forcing other nations to become free, is a metaphysical impossibility…no one, who is being forced, is ever free. But far be it from any Neocon to allow this thought entry into his cranium. Neocons never met a war they didn’t like.
Wars kill people and consume resources.
Nuclear wars consume vastly more wealth than there ever existed, to be stolen,..there’ve been no nuclear wars since Nagasaki got burnt to the ground, because it became abundantly clear that no booty could survive nuclear destruction and enrich the victorious survivors.
A step back from the precipice of world War, would be an international ban on deficit spending by governments.
The historic roots of deficit spending, were that kings borrowed money from lenders, used the funds to equip armies and navies, went to war, stole something in the fight, and sold it to get money to pay their debts.
A world that genuinely limits all governments from launching wars of aggression, should recognize the moral hazard of a debt that can only be repaid, by invading another nation.
This is the best comment I ever read in Wiess publication. Thanks Bob.
In 2600 BC , Babylon ruled the world. Nebuchadnezzar was The King who ruled the world which was a one world government and he took out the Jews at that time . He had a dream or a horrible nightmare which was interpreted by Daniel the captive Prophet which foretold his downfall and the downfall of every nation thereafter . You can read Daniel chapter 2 for the full story which is practically fulfilled but I will just quote one verse in Daniel 2:35 . Then was the iron, the clay, the brass, the silver, and the gold, broken to pieces together, and became like chaff of the summer threshing floors ; and the wind carried them away, that no place was found for them.
It’s easy to see now from history that all of these kingdoms and governments from that time to the present have passed away and we are in the final chapter of the dream , ” the feet of iron and miry clay.” Everyone knows that iron and clay won’t gel , so we are in the throes of self destructing. Wars, disruptions of nations, economies collapsing, until God almighty says ” it is finished. ”
Then you will see the survivors who love God , and who love one another and keep the commandments and laws of God and the “one world government” that the “world ” is looking for.
This is the “stone” which is the one Kingdom which stands forever.
Well said, take heed all!
Bank stocks and government debt are things to avoid. Dragi is being called out on his super stimulus bluff. It is becoming evident that this unelected emperor has no clothes.
I don’t care to comment at this time.
Hello Mike,
I am not sure about this contorted thesis the central banks utilize to support their contention that lower/negative interest rates will encourage consumers to spend more! If anything, it is having the opposite effect, as savers, particularly those near to or in retirement, must save more, not less, to achieve their retirement savings goals. It is an inverse correlation – the higher interest rates are, the less investor’s must add to savings and vice-versa.
Loose, borrowed money works for a few years…..but there is hell to pay a few years down the road. We are now a few years down the road.
Mike,
You ask: are we still early in this bear market process, or are stocks about to reverse course
and surge higher?
My guess, in looking at the charts….. we have another 90-100 points down on the S&P before a rally. Then much more downside.
F151, I agree with you only if Yellen fails to deliver the ” right ” speech containing the ” right words ” this week. The market is itching to rally given its oversold condition. I expect her to do the ” right ” thing. The markets will buy into it and rally up to around spx 2000. Then the party will be over. The support at 1800 will be taken out and the real pain begins. I am looking to get very short and have a lot of cash if this plays out. If not your scenario will occur. In the end, I think we are both right.
Washington doesn’t understand that we are in a war. Not just with Isis or radical Islam but with OPEC as well. Hundreds of Billions of dollars are already lost in assets and bankruptcies and all the media reports is BP laying off 7000 workers. Every day small and now medium sized oil companies are filing for bankruptcy. Until a major files (maybe Chesapeake) no one seems to give a damn. We could easily retaliate by setting a price for oil that will give our companies a small marginal profit and then putting a floating tariff on all imported oil. This would drive the world price down, stimulate Western Europr, Japan and Chinese economies, restart our road to energy independence and whatever money comes in because of the tariffs can fund the alternative energy projects the Democrats so sorely want. Of course OPEC may drown in the oil glut it would cause and maybe they would end the war.
Give me my markets to giving my universe they are hungry.
Creator,
K.
Why do you want to short US financial stocks when you say Europe is much weaker. Shouldn’t we be shorting Euro banks. Look at Deutsche Bank
you’re so smart.
The artificial surge in stocks and bonds brought about by Fed stimulus has come to its end. What goes up must come down! After the bubble bursts and empires fall and crumble it would be no surprise if all the scraps are scrapped together to try and keep them whole. I predict we are facing an upcoming era of mergers and acquisitions.
A close look at European banks should suggest there are a few diamonds in the rough. NRBAY, ING, and even HSBC are in superior financially position versus other European banks and for that matter many U.S. big banks. All three may not have hit bottom yet, however, perhaps they have.
Ever notice everyone says the opposite- like swimming in quicksand.
What a migraine.
All the talking heads , say , something different everyday: that way; they are able to pick the day they were correct , and not tell you about the day they lost you a ton of money listening to them- a year,Or, two , later – when they cite their newsletters proving what geniuses they were, for making the correct calls!
I e-subscribe to a lot of financial newsletters begging me to buy. I do not. I read what they have to say for self interest. I like this one and Harry Dent the best direct opposites in every way. I hope I live long enough to see who is right. I have trouble seeing Harry’s take on gold. The market seems to be rolling over and following oil over a cliff. I guess even the foreign money pouring into the US is starting to smell the roses. Anybody that still has money left outside the US has by now taken the hit so why bothering moving assets unless your Uber rich. For gold to follow the direction that Harry claims it would have to erase 6,000 years of history. China, Russia and all the other big accumulators would be in deep financial trouble if their gold stock piles fell to 700 or 300 an ounce. If we reach that point all investments would be tainted and it would be goodbye world.
I also read and like Larry Edelson and Harry Dent and what I think Dent misses on Gold is this; he may be correct in Gold going nowhere down but it would depend on what you base currency is. A couple of years ago the Euro was around $1.40, now it is down about 25% against the $ but about even against Gold. I also agree more with Larry on Gold as the last and only Safe/Chaos haven and a preserver of wealth..
The U.S. military budget is $763.9 billion for FY 2016 This appears not to include the CIA/Black Ops spending. It is as much as the next 8 countries combined spend.
Mike, its funny you write about this because this morning as I listened to the banking reports which included the statements from Deutsche plus full account reports from International, US National and Regional banks I literally had the same thought “oh my God it Lehman Marcus all over again”. And this time we have oil bankruptcies also draining banks accounts. Things could get very dicey from here and well into the end of March where I expect oil bottoms to solidify.
Can’t believe I said Lehman Marcus/don’t even shop at Neiman Marcus!!!!!!!!!!!!
Funny.
TYPE TOO SMALL ON SECOND PART AFTER THE REQUIRED CLICK !! I can’t read anything other that the first few paragraphs BEFORE THE CLICK !!
I have my own Oil Black and the Seven Sultans oil dream. I pull into the gas station, insert my credit card and enter the zip code. I then fill my gas tank and see a certain dollar amount. The next day I check my credit card balance and I see a pending credit for the dollar amount of the gas I got the day before. Yep! ‘They’ are paying us to use oil. The oil glut is already insane, do you think it got get that crazy? Will we see oil sheiks bombing each other’s oil fields? In the financial sector got we get paid to borrow money? Gee wouldn’t it be nice to paid to borrow money to buy a new big screen TV or a new car? “Here are the keys to your and your first monthly payment of $280.00 to your savings account.” We all have our dreams don’t we?
You are definitely dreaming. Suppose you borrow $50,000 to buy a car at (a) 5% interest or (b) -5% interest. Your first month’s payment (48 month loan) will be (a) $1042 principal + $208 interest = $1250 or (b) $1042 principal – $208 interest = $834. I’ve purposely exaggerated the negative interest rate (probably by a factor of 3-5), but you’re still going to have to come up with over $800/month to pay off that car loan. Can you afford that?
The coming credit default collapse in the US will be initiated by the gradually increasing defaults on all those sub-prime auto loans that have been repackaged and sold (as were the housing loans). The millions of sub prime car loans can never be repaid, and the defaults will snowball as the recession deepens. It is inevitable.
Mike,
Reduced to its basics, the current energy problem is due to the combination of worldwide overproduction of crude oil, and an out of touch, lame duck U.S. president, who is captive of the environmentalist lobby.
Let’s take a page from OPEC’s playbook. Recall that OPEC completely cut off crude oil shipments TO the U.S. in the mid-1970s.
Now merge these two concepts. Except this time the U.S. cuts off all crude oil shipments FROM OPEC, while at the same time increasing the production of both conventional and fracking domestic crude, plus importing more crude from our NAFTA partners (Canada and Mexico). This will, of course, include constructing the Keystone Pipeline the moment that our misguided obstructionist president is safely back in Chicago, Hawaii, Indonesia, Kenya, etc.
It’s funny how all talk about American energy independence has disappeared completely. Somehow it’s now OK to depend on the sheiks. Jim
Funny how a lot of things have changed isn’t it, when debt starts to collapse?
Saudi Arabian terrorists are starting to smell blood. The Saudi’s used to have an iron shield around the country now they are dealing with car bombs and other terrorist features. I guess that is why they will not even allow their own kind to immigrate into the country. I could never understand apart from oil why the US wanted to do business with these Scimitar waving Rasputins. Then I realized there was a level of power above the heads of American politicians whose policy was profits at any price. Finally I realize after all these years that I was never in control of my own destiny. I was feasting off of the crumbs falling off of the 1% percenters table.
We have been chummy with the Saudis because Kissinger’s deal with them to only accept dollars in payment for their oil in exchange for military protection allowed us to play outrageous games with our currency. Our high standard of living has depended on it. Jim
Richard, well said. the United States is now a welfare state. most of the claims opportunistic.
As for the World economy. Go long on casket companies, for –
“DEAD THINGS DON’T GROW”
Everything Mike is saying amounts to an attempt at market timing. Market timing does not work and never has worked. Stay the course is the best advice. And it is free advice. No one is making a living from it’s sale!!! On the other hand, many pundits are using hyper bole to earn a living!
If you can’t see the debt bubble at this point in the game you are looking at the wrong viewpoint. You are probably believing politicians.
Staying the course makes sense in most any conventional environment but this is debt bubble territory making 1929 look like a stable economy.
The banks are bundling sub prime mortgages again, plus student loan defaults and the auto sub prime bottoms are about to fall out. Look out below!
Looks like minus 12.7 points is all the dead cat bounce your going to get. If you have a 100% margin now and loaded with stocks I would really start to sweat.
I believe the oil glut caused by producers like Saudi Arabia is,in reality, an attempt by them to try to break alternative energy producers; given the progress being made by these Alternatives , and the fact the world is suddenly realising the reality that is global warming, means that in the medium term, oil could become near worthless.
So, oil producers ,seeing the writing in the wall, are dumping their oil on the problem while they still have buyers for it.
If these Alternatives turn out to be as good as they promise, the oil barons might soon be looking back on “the good old days” when they could get US$30 for a barrel of oil.
Hi Mike:
As a fellow BU alumni, I must say you give the school a great name. Your are one of the better analysts out there with an ability to see beyond the noise. I was wondering if anyone else sees a parallel between what’s going on with central banks losing control and the recent political developments (here in the US and elsewhere) where the ‘establishment’ is facing a rebellion of sorts? I think there is a relationship between the two. After 40 years of the same old rhetoric from self serving pols, are people saying enough is enough? I think so and the markets seeming to be saying to the CB-enough is enough.
Peter,
If you were to review the papers of the early 1930’s you would find that the Conservatives were saying much the same thing about “Communist Pinko” FDR….. They were wrong then and they are now…
In my opinion, the biggest error the Conservatives made was bringing Rove…. Now after 28 years of domination based on lies and crushing everyone below the wealthiest 3%, the public is revolting, just as they did from 1932 forward…..
I posted my comment about the Deutsche Bank derititives situation to your article about European Banks last week. This is a serious situation; please continue to stay on top of it as this is in my opinion one of the most imminent of the various crisis to face the world. These postings by you resonate better with me than hype with little substance.
The Federal Reserve Bank of Chicago came up with a new calculation of government debt including pensions and health care. Only $102 Billion away from $50 Trillion, or 288.4% of GDP. Only Japan may be more in debt than our government. Remember, it is the politicians that WE elected who put us in this situation. Each man, woman and child owes almost$156,000, according to this, doubtless conservative, estimate.
Any society is three meals away from a riot.
No joke. After three days without food you will do anything to prevent starving to death before you are too weak to move. Scientific fact.
Most regime change in history was preceded by starvation. Rome and before is too obscure.
The most famous examples are 1917 russia where bread rations were down to below subsistence and 1789 france when the wheat crop failed. You can add 1932 germany and usa. Germans went nazi. usa went new deal.
Shipping and base metals collapsed in 2008.
Two closes below s&p 1800 confirm the nasdaq under 4000. Ten year notes over 131
signalled big trouble. Junk bonds basis JNK
under 2009 lows of $25 = disaster. Gold over $1250 or holding over $1200 by end of month mean a scramble for flight capital. Dollar index undet 95 looks like a top is in. Crude oil under 2009 low of $30 by end feb. kills credit swaps.
By the fall of 2016 will Americans be hungry and angry enough to riot if Trump and Sanders are excluded from mainstream politics? That depends on bread rations more than circuses.