For a second time in the past three weeks, stocks suffered another round of losses which accelerated as the week progressed. Of the major indices, taking the biggest hit were the Dow Industrials, followed by the NYSE Composite, S&P 500, and NASDAQ, in percentage terms.
The Dow's 3.31% fall was made possible by a Friday selloff which saw the blue chips decline by 730 points, the largest selloff since June 11, when stocks suffered a major blow preceded by an ominous island reversal of June 5, 8, 9, and 10. (see video below for more)
Friday's action may be presaging an oncoming decline of a magnitude rivaling the initial slide in March. The second quarter comes to a close on Tuesday and everybody on wall Street knows that it's difficult to "price in" a GDP decline which may be on the order of 35-50% when the first figure is announced on July 30.
Prior to that momentous milestone, corporate earnings reports will begin to flow to the street following next week's July 4 Independence Day holiday. The coming week will be shortened by a day, as Friday is a national holiday, giving most Americans a three-day weekend. Stock markets, banks, the postal service and most city and county offices will be closed. Hopefully, most of them will reopen on July 6.
For the week just concluded, treasury yields were clobbered, the 10-year note falling from 0.71 to 0.64%, the lowest since May 14 and approaching the record low of 0.58% from April 21st. As the 30-year bond yield fell from 1.47 to 1.37 over the course of the week, the curve flattened significantly, 125 basis points covering the entire complex. If this is what the Fed considers success in "curve control," they can have it, with the short end - one-month to two-years - covered by just five basis points (0.12 to 0.17%).
These low rates at the front end aren't by accident. They are policy and they are indicative of a recession if not outright depression. Adamant that they will not go to negative rates as has been the case in the Eurozone and Japan for years, the Fed's real rates have been in the red pretty much since the previous crisis in '08-'09, i.e., they were lower than the inflation rate. The one year note only crested above one percent in 2017. A year ago, it was yielding 1.92%, a stark comparison to Friday's close at 0.17%.
The Fed promised cheap credit and they are delivering.
Oil prices were slapped down after WTI crude tested $40/barrel, peaking at $40.73 on Monday, only to close out at $38.49 on Friday. Expect oil to continue trading sideways to lower if stock prices begin to falter, or, vice versa. Oil declines could help trigger or exacerbate a rundown on equities.
Precious metals were by far the big winners for the week. Both gold and silver advanced smartly despite a desperate attempt to crater their prices Friday on the NYMEX failed miserably. The morning rout sent gold reeling $20 to the downside, bottoming just below $1745 per ounce. So enamored with "V"-shaped recoveries, Wall Street got an unexpected one when gold prices recovered all of the losses within an hour and proceeded to close near the high for the day at $1771.50. Laughably, Friday's recorded London PM fix was set at $1747.60, setting up a $24 weekend arbitrage gap. Maybe, considering the problems the paper COMEX markets have had in recent months, it's not so funny for gold shorts, which are burning.
Silver savers should be delighted with the price action this week. Not only was a raid similar to the gold price suppression thwarted on both Thursday and Friday, but spot edged three cents higher than the closeout future price, at $17.83 the ounce, the highest Friday price since February 21, just prior to the epic COVID collapse.
Current physical prices continue to demand high premiums. This week saw prices for silver art bars absolutely explode higher, some one ounce bars selling above $40. Average and median prices for one ounce gold coins and bars were captured at prices $33 to $45 higher than a week ago.
Here's a glimpse at current selected prices on eBay (shipping included):
Item: Low / High / Average / Median
1 oz silver coin: 25.95 / 40.95 / 30.92 / 29.47
1 oz silver bar: 27.00 / 45.44 / 34.62 / 32.93
1 oz gold coin: 1,827.85 / 2,109.95 / 1,919.39 / 1,901.60
1 oz gold bar: 1,861.66 / 1,920.65 / 1,879.77 / 1,873.92
Argentina's Debt Crisis Far From Resolution
Argentina's government continues to play cat and mouse with international creditors, extending the deadline for negotiations concerning $65 billion worth of bonds to July 24.
Having already defaulted on a $500 million interest payment on May 22, the government is doubling down, indicating that it will miss another similar payment in June, which has a 30-day grace period. The chances of a settlement agreeable to the government and its creditors continue to deteriorate as interest payments are missed and the value of the bonds plummets, some selling off to as low as 37 cents on the dollar.
Talks stalled over the past two weeks as investors including BlackRock, Fidelity, AllianceBernstein, and Ashmore Group PLC, rejected a government proposal tied to agricultural exports while seeking recovery of between 49 and 57 cents on the dollar.
At the same time, the province of Buenos Aires, Argentina’s largest province, is negotiating with bondholders on the restructuring of $7.148 billion in debt and extended its deadline for a negotiated settlement to July 31.
Per previous proposals, payments would not begin being made on the currently-defaulted bonds until 2025. This article, published by the Council on Foreign Relations, offers the most comprehensive details, including charts that break down Argentina's $323 billion of debt, all of which is at dangerous risk levels.
At a time when the country's GDP is predicted to decline by 10 percent, the severity of the financial crisis cannot be understated, though mainstream television media in America has nearly completely neglected to report on the issue. Argentina has suffered through decades of boom and bust over the past 45 years, 20 of which showed GDP in decline.
It's not a question of when Argentina defaults on its debts, it's a question of how severe the defaults will be, how they will affect government pensions, and the ability of the government to maintain its status as a going concern. With a population estimated at 45 million, Argentina's problems are quickly becoming everybody's, as tens and perhaps hundreds of billions are in the process of being eviscerated.
With the government of President Alberto Fernandez content to play kick the can by extending the negotiation deadline for a fifth time, the dithering is taking its toll on investors. While a formal default has only been declared on portions of Argentina's debt, triggering the awarding of a credit default swap (CDS) recently, these things have a nasty way of snowballing into global crises, as was the case with Mexico in 1982, the Asian Crisis in 1997, and when Russia devalued the ruble in 1998.
Having to deal with some of the most severe lockdowns in the world due to the COVID-19 panic, Argentina is ill-prepared to deal with a financial hardship of this magnitude. The situation could spiral out of control at any time, when one side or the other finally throws in the towel and walks away. Consider Argentina's plight a fluid situation with more headlines and fireworks likely over coming months.
At the Close, Friday, June 26, 2020:
Dow: 25,015.55, -730.05 (-2.84%)
NASDAQ: 9,757.22, -259.78 (-2.59%)
S&P 500: 3,009.05, -74.71 (-2.42%)
NYSE: 11,604.43, -260.68 (-2.20%)
For the Week:
Dow: -855.91 (-3.31%)
NASDAQ: -188.90 (-1.90%)
S&P 500: -88.69 (-2.86%)
NYSE: -375.19 (-3.14%)
Peak Prosperity's Adam Taggert and friends discuss threats to the stock market, highlighted by their charting of the recent Island Reversal:
Showing posts with label sovereign debt. Show all posts
Showing posts with label sovereign debt. Show all posts
Sunday, June 28, 2020
Tuesday, June 16, 2020
Stocks Stutter, Rise On Fake Fed News; Federal Debt Surges Past $26 Trillion; Argentina Default Triggers CDS
Wall Street got a bit of a shock Monday morning as stocks sold off first in the futures market and transitioned into a gap lower at the opening bell. What looked like a continuation of Thursday's selloff - interrupted by the dead cat bounce Friday - turned out to be a short-lived event.
With the Dow down below 25,000, losing more than 700 points just minutes into the session, buyers began to emerge, pushing stocks higher by 2:00 pm ET, the major indices had made up considerable ground. The NASDAQ was already positive when the Fed issued a press release, rehashing some old news to make it look new to the algos.
The press released looked like the Fed was launching another credit facility for corporations when in fact this facility (SMCCF) had been in the pipeline since March. They announced they'd begin buying individual corporate bonds, so that when companies go looking for a lender - for whatever purpose - they need look no further than the Federal Reserve, now not only the buyer and lender of last resort, but of first resort as well.
Per the Fed's press release:
That sent all indices into positive territory, and everything was again alright with the world as stocks sported gains to start the week.
Whether the "recovery" looks like a V or no V, the US national debt vaulted past $26 Trillion over the weekend without much fanfare (in fact, none). Some thought it would make it by the 4th of July. It came in 45 lengths ahead of predictions, like Secretariat winning the 1973 Belmont Stakes.
By the end of June the federal government will have added more than three trillion dollars ($3 trillion) to the national debt, an astonishing pace. At the current run rate of a trillion every two months, by the end of 2020, the debt would rise to $29 trillion, and to $35 trillion by December 2021. What's either frightening or amusing about the growth rate of the national debt is that it is more likely to accelerate than back off as the dollar heads for a fiscal cliff. Combined federal, state, and local government expenditures currently account for nearly half of America's GDP, and, since nearly half of that is borrowed, it means a good quarter of the GDP is an accounting fiction. Government produces exactly nothing of value. They spend. Total combined spending by government will exceed $10 trillion for the fiscal year ending on September 30.
If one were to take from the GDP calculation all government spending that was done on borrowed money, GDP wouldn't be over $20 trillion as the official version purports. Instead, it would be bumping up against $15 trillion. If one took out all the purchases made on credit cards or by mortgages, it would be even lower. The fact is that the GDP calculation is a convenient reference for Wall Street and government, but it does not really reflect the actual condition of the economy. What's happening is that as expenditures are growing, tax revenues are falling, and borrowing must continue to rise to fill the gap.
It's about as an unsustainable condition as one could imagine. With any luck (and even that's in doubt), the entire system might make it through to November, just in time to implode after the elections. That's hardly a certainty. The US and global economic systems are now so fragile that about a third of the entire global GDP is borrowed. Eventually, half of GDP will be borrowed, then all of it, at which time the system will have completely broken down. Companies which must borrow just to meet payroll cannot last. Governments which borrow to meet spending demands cannot last. Consumers with low to no income and piles of debt will default. It's beginning to happen and will accelerate in the third and fourth quarters of this year.
Everything is in play. Jobs, retirement funds, even Social Security, a ponzi scheme from the start that may not make it through the end of this decade.
Not to be outdone, Argentina extended the deadline for negotiations for a fourth time, to June 19, on $65 billion in sovereign debt.
They missed a $500 million interest payment in May, prompting the lenders to meet with Argentine officials to discuss a solution. It also triggered a credit default swap (CDS) event. Lenders of Argentina's debt include PIMCO, BlackRock, and Franklin Templeton. Because CDS are private contracts, it's not known whether any of them hold the swaps, which acts as insurance against default.
One thing is for certain. Somebody's out $1.5 billion and some other entities made a killing on the trade. Problem arise in credit default swaps are when the company insuring against the loss doesn't have the funds to cover the bet when it goes south. That's what happened with AIG in the GFC back in 2008. If Argentina doesn't solve this issue soon (it may already be too late) other swaps are sure to be triggered, more people will lose money and the derivative market may begin to look like a pock-marked battlefield.
Could Argentina be the canary in the coal mine that sets off a wave of sovereign defaults? Possibly, though such things tend to take years to develop and there are many attempts at remediation in the interim. Sovereign defaults are at the end of the list of things about which central banks need to worry. For now, they've got global stock markets that will melt down without their tacit support, growing civil unrest, and COVID-19 with which to contend.
Their plate seems rather full for the moment.
At the Close, Monday, June 15, 2020:
Dow: 25,763.16, +157.62 (+0.62%)
NASDAQ: 9,726.02, +137.21 (+1.43%)
S&P 500: 3,066.59, +25.28 (+0.83%)
NYSE: 11,942.91, +75.74 (+0.64%)
With the Dow down below 25,000, losing more than 700 points just minutes into the session, buyers began to emerge, pushing stocks higher by 2:00 pm ET, the major indices had made up considerable ground. The NASDAQ was already positive when the Fed issued a press release, rehashing some old news to make it look new to the algos.
The press released looked like the Fed was launching another credit facility for corporations when in fact this facility (SMCCF) had been in the pipeline since March. They announced they'd begin buying individual corporate bonds, so that when companies go looking for a lender - for whatever purpose - they need look no further than the Federal Reserve, now not only the buyer and lender of last resort, but of first resort as well.
Per the Fed's press release:
The Federal Reserve Board on Monday announced updates to the Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.
As detailed in a revised term sheet and updated FAQs, the SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility's minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility's current purchases of exchange-traded funds.
The Primary Market and Secondary Market Corporate Credit Facilities were established with the approval of the Treasury Secretary and with $75 billion in equity provided by the Treasury Department from the CARES Act.
That sent all indices into positive territory, and everything was again alright with the world as stocks sported gains to start the week.
Whether the "recovery" looks like a V or no V, the US national debt vaulted past $26 Trillion over the weekend without much fanfare (in fact, none). Some thought it would make it by the 4th of July. It came in 45 lengths ahead of predictions, like Secretariat winning the 1973 Belmont Stakes.
By the end of June the federal government will have added more than three trillion dollars ($3 trillion) to the national debt, an astonishing pace. At the current run rate of a trillion every two months, by the end of 2020, the debt would rise to $29 trillion, and to $35 trillion by December 2021. What's either frightening or amusing about the growth rate of the national debt is that it is more likely to accelerate than back off as the dollar heads for a fiscal cliff. Combined federal, state, and local government expenditures currently account for nearly half of America's GDP, and, since nearly half of that is borrowed, it means a good quarter of the GDP is an accounting fiction. Government produces exactly nothing of value. They spend. Total combined spending by government will exceed $10 trillion for the fiscal year ending on September 30.
If one were to take from the GDP calculation all government spending that was done on borrowed money, GDP wouldn't be over $20 trillion as the official version purports. Instead, it would be bumping up against $15 trillion. If one took out all the purchases made on credit cards or by mortgages, it would be even lower. The fact is that the GDP calculation is a convenient reference for Wall Street and government, but it does not really reflect the actual condition of the economy. What's happening is that as expenditures are growing, tax revenues are falling, and borrowing must continue to rise to fill the gap.
It's about as an unsustainable condition as one could imagine. With any luck (and even that's in doubt), the entire system might make it through to November, just in time to implode after the elections. That's hardly a certainty. The US and global economic systems are now so fragile that about a third of the entire global GDP is borrowed. Eventually, half of GDP will be borrowed, then all of it, at which time the system will have completely broken down. Companies which must borrow just to meet payroll cannot last. Governments which borrow to meet spending demands cannot last. Consumers with low to no income and piles of debt will default. It's beginning to happen and will accelerate in the third and fourth quarters of this year.
Everything is in play. Jobs, retirement funds, even Social Security, a ponzi scheme from the start that may not make it through the end of this decade.
Not to be outdone, Argentina extended the deadline for negotiations for a fourth time, to June 19, on $65 billion in sovereign debt.
They missed a $500 million interest payment in May, prompting the lenders to meet with Argentine officials to discuss a solution. It also triggered a credit default swap (CDS) event. Lenders of Argentina's debt include PIMCO, BlackRock, and Franklin Templeton. Because CDS are private contracts, it's not known whether any of them hold the swaps, which acts as insurance against default.
One thing is for certain. Somebody's out $1.5 billion and some other entities made a killing on the trade. Problem arise in credit default swaps are when the company insuring against the loss doesn't have the funds to cover the bet when it goes south. That's what happened with AIG in the GFC back in 2008. If Argentina doesn't solve this issue soon (it may already be too late) other swaps are sure to be triggered, more people will lose money and the derivative market may begin to look like a pock-marked battlefield.
Could Argentina be the canary in the coal mine that sets off a wave of sovereign defaults? Possibly, though such things tend to take years to develop and there are many attempts at remediation in the interim. Sovereign defaults are at the end of the list of things about which central banks need to worry. For now, they've got global stock markets that will melt down without their tacit support, growing civil unrest, and COVID-19 with which to contend.
Their plate seems rather full for the moment.
At the Close, Monday, June 15, 2020:
Dow: 25,763.16, +157.62 (+0.62%)
NASDAQ: 9,726.02, +137.21 (+1.43%)
S&P 500: 3,066.59, +25.28 (+0.83%)
NYSE: 11,942.91, +75.74 (+0.64%)
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