The Fed’s Bubble Blowing, America Teeters On the Verge of the Next Great Crash
Stock prices are the biggest bubbles right now. Some stocks are up by 300% over the last 10 years, while those same corporations are doing worse than they were.
Low interest rates, huge amounts of QE caused corporations to use not just their profits, but also take on (cheap) debt to do huge stock buybacks and pay their CEOs lost of money. I think it might happen this year, but more likely next year. Even if interest rates stay low, QE is (finally) ending. While purchasing power is not getting any better.
Huge debt funded buybacks this cycle to take on stocks which are 250% normal valuation (per John Hussman). Corporate debt has exploded and surely will be a major part of the next crisis.
The hidden risk to the economy in corporate balance sheets
In March, S&P cut its ratings on Macy’s to BBB, two notches above junk, as competition from internet retailers continues to dig into the department store chain’s sales. The company’s debt, net of cash, has risen over the past three years. Meanwhile, it has spent $5.2 billion buying its own stock, or $1.4 billion more than those shares are worth now, according to data provider FactSet. Companies often buy their shares and take them off the market to goose their earnings per share, a widely watched measure of success.
Oil company Hess was also recently downgraded, mostly because of a plunge in oil prices beyond its control. But its own moves hurt, too. Instead of whittling away at its debt with the cash it raised in recent years from selling parts of its business, it has spent billions buying its stock. Moody’s Investors Service cited Hess’ heavy debt burden when it downgraded the company.
The similarities to the last debt crisis may not end there. Like folks who kept refinancing their mortgages instead of paying them off, companies have “rolled over” their old loans by taking out new ones. This makes sense at many companies because interest rates are so low.
As markets get uber excited over financials, why is bank lending cascading lower?
— Chris (@CL26_9) September 25, 2017
VIX Options Volume Hits All-Time High As Stock Speculators Risk Record Amount On Continued Calm
A record 2.61 million options on the VIX traded on Monday, surpassing a previous peak reached in August.
Shockingly, Bloomberg reports that the activity appeared to be led by one investor, who rolled over a massive bet on a return in market turbulence to the end of the year.
Shortly after Monday’s market open, an investor rolled over a position of more than 486,000 Oct. 25 calls to December.
Monday’s trade was effectively an extension of a bet that volatility will more than double by the end of the year — the wager was initiated in July but that didn’t come to fruition since the VIX gained only 2.5 percent in the period.
While the trade was big — it accounted for almost half of Monday’s call volume and 11 percent of the total calls outstanding — wagers that the VIX will rebound have multiplied in recent weeks as shorting volatility has lost some of its appeal.
Fitch Ratings is expecting China’s first local government bond defaults, but timing uncertain
- China may see its first local government bond defaults soon, said Fitch Ratings
- The Chinese government will contain systemic defaults, it said
China may witness its first local government bond defaults, although the timing was uncertain, Fitch Ratings said in a press release issued on Sunday, amid persistent concerns over high debt levels in the world second largest economy.
These bonds were issued by Chinese local government financing vehicles (LGFVs), which were created by local authorities to bypass restrictions on borrowing.
There are concerns about the potential for a wave of defaults in China due to high local government debt, which could impact the financial markets and potentially spread a wave of contagion across the global economy.
The LGFVs have also borrowed from the Chinese shadow banking sector as official channels dried up due to the government’s crackdown on leverage.
“The largest 30 banks hold almost $43 trillion in assets, compared to less than $30 trillion in 2006, and concentration is continuing to increase in the US, China, ..