I’m of the long standing view that Fed chairs have one prime responsibility above all others: Keeping confidence up, and if it requires to sweet talk problems then that’s what it takes. The often classic quote by Ben Bernanke of “subprime is contained” right before it blew up in everybody’s face being a prime example. Is the Fed that blind to reality or just on an elaborate marketing mission to ensure that nobody panics and sells stocks? I leave that judgment to the reader.
But I can see differing messaging coming out the Fed when people are in office and when not.
Take corporate debt for example.
Here’s Jay Powell in May of this year sweeting talking and dismissing any concerns:
“Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate. Moreover, banks and other financial institutions have sizable loss-absorbing buffers,” he said. “The growth in business debt does not rely on short-term funding, and overall funding risk in the financial system is moderate.”
Sweet, no worries then. Odd then that Janet Yellen, no longer in office, feels free to say in essence the exact opposite:
“I have expressed concerns about leveraged lending,” Yellen said during a keynote discussion that was closed to the press. “I do think non-financial corporations have run up, really, quite a lot of debt.”
“What I would worry about is if the economy encounters a downturn, we could see a good deal of corporate distress. If corporations are in distress, they fire workers and cut back on investment spending. And I think that’s something that could make the next recession a deeper recession,” “I have concerns about the deterioration in lending standards that we have seen,” Yellen said. “A large share of it is covenant-lite and some of the explicit ways in which covenants have weakened are a concern to me.”
No worries from Powell, worries from Yellen.
Well, for one corporate debt has increased by 64% in the last 9 years now reaching $10 trillion:
Good thing profits have vastly increased in that time:
Oh wait, corporate profits have actually peaked in 2014. Well that’s odd, as markets keep racing higher from high to high you’d think there’d be this massive expansion in profits. Well of course not, profit growth peaked last year on the heels of the corporate tax cuts resulting in corporate tax payments collapsing to levels only seen during big recessions:
Ponder this: Corporations now pay roughly the same about of taxes as they did in the mid 90’s when the economy and aggregate profits were much smaller.
Quite the historic deal.
No, we know why stock markets kept rising in 2019: Thanks to Fed intervention:
Goldman admits reality: “With S&P 500 earnings on track for roughly 0 growth from this time last year, solid returns likely would not have been possible without central bank support. Central bank easing accounts for almost all of the price return since the start of the year” https://t.co/Akv3Zll7HL
— Sven Henrich (@NorthmanTrader) November 22, 2019
Indeed if you take a look at corporate profits versus the market’s ascent we can observe a large deviation from the actually profit picture:
The above mentioned tax cuts did help the bottom line of course and one can argue the picture looks slightly better when viewed on an after tax basis:
Thanks tax cuts, but the deviation remains. And it remains if you view it through the lens of EPS:
Have #equities got ahead of themselves? S&P 500 Index vs. #earnings per share. pic.twitter.com/sQGfmGtuIS
— jeroen blokland (@jsblokland) November 24, 2019
The aggregate picture is stunning:
And of course EPS growth is in the eye of the beholder as earnings are regularly overstated via non GAAP versus GAAP accounting:
Not to mention the insidiously deceiving growth illusion created by buybacks.
So what you have is a market disconnecting ever farther from the underlying already weakening and overstated earnings growth picture, earnings that require an exorbitant amount of debt expansion to produce with much of the tax cut benefits going toward buybacks while half of the debt expansion is running on BBB fumes:
“The growing universe of triple-B rated US corporate debt — the lowest rung of the higher-quality bond market — has garnered the most attention. At $2.5tn, it is now twice as big as the entire junk bond market beneath it. The hunger for yield has “paved the way for unprecedented erosion in capital structures and credit quality”, Moody’s noted in a recent report.”
Do worry says Janet Yellen, but don’t worry says Jay Powell. The economy is in a good place he says apparently instructing all the Fed speakers to read off the same script:
Sweet. How do they all get on the same page when determining their market communication strategy? Sadly the Fed minutes are void of any such discussions. Must be a different meeting.
Yea, the economy is in a good place:
— Sven Henrich (@NorthmanTrader) November 24, 2019
And subprime is contained and corporate debt is not a problem as long as you are Fed chair. It only becomes a problem when you’re no longer Fed chair.
No, corporate debt is a massive problem, it’s a ticking time bomb that millions of workers get to pay for during the next recession. That’s not my hyperbole, no Sir, or have you already forgotten what Janet Yellen already told you?
“if the economy encounters a downturn, we could see a good deal of corporate distress. If corporations are in distress, they fire workers and cut back on investment spending. And I think that’s something that could make the next recession a deeper recession”.
No financial crisis in our lifetime when Fed chair, the next recession could be deeper thanks to extended corporate debt when not Fed chair. Funny that.
She knows and so does Jay Powell, he’s just busy keeping confidence up by telling you everything is fine and dandy. After all that’s precisely why he cut rates 3 times and expanded the Fed’s balance sheet by over $280B in 2.5 months. Cause that’s exactly what you do when the economy is in a good place.
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Thank you. Week in and week out. Thank you.
2nd that !
“The hardest thing to explain is the glaringly evident which everybody had decided not to see”.
Here comes hyperinflation, in real terms. Great work Sven. You are one of a handful that still has integrity in what you do. Thanks.
As they always say “It’s different this time” .
It will not be a deep recession…but an unprecedented depression….a systemic collapse.
still short, sven? Oops.
Actually, maybe not a bad time to go short. This rally has been unrelenting – maybe it will be “relenting” soon. It’s extremely “long in the tooth”. Markets often turn around and crash for no apparent reason – 1929, 1987, 2000 for example. This market has been a secession of rising wedges that are getting smaller and smaller, more frequent and with shallower pullbacks, if i read Sven’s charts correctly. I can clearly see the multiple wedge formations within a rising mega-wedge that looks nearly complete. Scary charts.
agree, but not a good time to have been short for a long time. His problem seems to be that ‘the market isn’t doing what it SHOULD be doing’, therefore very soon things will reverse. I wish it DID work like that.
It appears to me that “the tail wags the dog.”
Simply, futures small volume overnight trading dictates direction for massive passive volume flow when the market opens.
Don’t know who these overnight players are…but, if they ever start looking cross eyed at one another the “market” just might find a new direction.
Sure would appreciate a better understanding of just how Fed liquidity actually gets into the hands of some actual person/entity that lays down money for an at risk market purchase. What is the conduit and how does that conduit function?
Hey Stray Dog,
the “liquidity” makes it into the market this way. The large money center banks essentially get money from the Fed for free, or very close to free. So they lend it out. I was trading S&P e-mini’s back in 2008 via Interactive Brokers. One day I get a pop up message from IE offering me a margin loan for $500k at . . . 1.5%. I figured IE was getting the money from Goldman at .50% or .75% or something like that. And Goldman was getting it from the Fed at .10% or less. It was stupid money. As the markets were crazy I passed, not knowing (or believing) that the Fed would do anything . . . anything to get the markets moving up again. And here we are later, 11-12 years down the road and Wall Street is addicted to cheap money like a blowjob hooker to crack cocaine. At some point this isn’t going to end well . . . .
Thank you, Mr Kenny,
Simple enough and makes sense. I have never seen an explanation for how the actual pipeline / conduit for / from the Fed worked so quickly.
So, helicopter money turns into real money put at risk. I presume this is why the Fed’s brief attempt at QT had such negative market consequence. Still, even with unlimited QE, it would seem to me that at some point the real investing marketplace will just say, “this is bullshit.”
When that day finally comes and aging baby boomers nearing or at retirement start pulling their REAL money out I’m guessing the Fed’s QE, even with negative rates, might have trouble finding takers in the equity market.
Treasury has a direct line to exchanges via the “Working Group”.
Failure to account for CB infused. liquidity playing absolute havoc with regular T.A., including the consistently wrong Ellioticians…but they keep counting…
Yes, all past charts and events are of no value here and going forward. We are in unchartered waters with no true markets of any kind whatsoever and we’ll eventually get to our destination when we crash on the rocks.
correct. Anyone who can trade this kind of market profitably…my hats off!!! I lost a fortune the last year. I gave up.