A FINANCIAL SHOCKWAVE OF POLITICALLY DRIVEN POLICY BLUNDERS

SECOND CONSEQUENCE:

(NOTE: First Consequence Newsletter: https://conta.cc/3EfSn0U )

The US being politically consumed is about to unwittingly trigger the greatest Monetary/Fiscal policy blunder in US history. It is on the verge of stopping Monetary stimulus, (Taper now expected to begin in November), while exploding both taxation and bond supply higher. This is the face of the US and global economies ominously rolling over!

These policy blunders will result in a situation far worse than 70’s style Stagflation! It will potentially be called the Great Stagflation (or worse)!

A POLICY DISASTER WAITING TO HAPPEN!

A $3 TRILLION TAX HIKE IN A SLOWING, END OF CYCLE ECONOMY??

In the September UnderTheLens video we featured 10 Global PMI slides against many of the world’s leading indicators. The video slides made it quite evident that the Global economy is slowing significantly.

PEAK PROFITS BEFORE MASSIVE TAX INCREASES??

The BofA Global EPS model says global EPS peak was ~40% in April (model is driven by China FCI, Asia exports, global PMI and the US yield curve). Global EPS is now projected to decelerate very sharply to ~9% by November.

We expect this to be driven by a combination of:

• • Inflation,
  • Supply bottlenecks,
  • Unwillingness of companies to increase inventories given Delta,
  • Peak US consumption,
  • China economic weakness,
  • Fiscal cliffs and Geopolitical risks.

Since the 2008 Financial Crisis, the Chinese Credit Impulse has been one of the most important indicators to follow. Chinese Credit was directly responsible for taking the global economy out of the fallout from the US Financial Crisis. It is now clearly signalling where we can expect the US economy to be headed (Chart to the right)

… while we now are about to implement a $3 Trillion tax hike??

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ON TOP OF A DEBT CEILING DEBACLE

There is a chance that this insanity may be derailed, but then only partially. Between the Infrastructure Bill and the Congressional Continuing Resolution (CR) being contained (by Senator Joe Manchen’s $1.5T upper limit), we can still expect to see increased spending close to $3 Trillion.

CRIMPED CORPORATE CASH FLOW IS GOING TO DERAIL BUYBACKS!

The Equity Markets have been underpinned by Stock Buybacks & Dividend payouts

The rise in the stock market has been underpinned by cheap financing and readily available credit, which allowed corporations to borrow to buy back shares and pay out rich dividends.

This is now already changing and can be expected to get worse as “zombie” corporation hoard cash flow in fear of potential insolvency, which normally accelerates during conditions of tightening credit.

Bond yields currently approximate equity yields. Normally bond yields are in excess of stock yields. This is a red flag for equity holders.

CONCLUSION

There is a MAJOR global accident ready to happen in

High Yield (Junk) Credit and IG Triple CCC Corporate Debt!

Global corporate debt as a percentage of GDP has exploded since the 2020 Covid market sell-off.

Though sovereign debt has also exploded, nations do not go bankrupt as they can always print more money and fight the resulting inflation pressures. Corporations have no printing presses! Corporations survive on free cash flow and credit – especially when revenues and earnings are under pressure.

In the last newsletter we outlined the serious problems ahead in HY Junk Market bonds. We can expect similar problems with corporate IG bonds and their equity prices, as they reduce stock buybacks and shrink dividend payouts.

“When the global economy shut down in 2020, S&P 500 profits declined by -20%. Companies responded by cutting dividends and buybacks by an even larger -27%. More recently, earnings have jumped +32%, yet dividends and buybacks have increased by only +1%.” 

John Authers – Bloomberg