OVER-LEVERAGED HY ENERGY BONDS WILL LIKELY IGNITE THE NEXT CREDIT CONTRACTION AS ROLLOVERS BEGIN
,MATASII BACKDROP CHARTS TO SRSOCCO REPORT (Below Bottom)
Morgan Stanley wealth just took their high yield allocation to zero! In a note explaining the move, CIO Mike Wilson said the following:
While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession — which is something credit markets figure out before equities.
We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.
Back in November, the market got a preview of what an unwind in high yield might look like when idiosyncratic risk (i.e., sector-specific problems) bubbled to surface. Amid the short-lived rout, investors obsessed over the breakdown of the correlation between junk and equities.
- If we are, as many people believe, late cycle in the U.S., is it fair to say that high yield will turn before equities?
- If central bank asset purchases are effectively creating an indiscriminate bid for junk by making the hunt for yield increasingly desperate, will the tapering of those asset purchases by the ECB make that bid more judicious and thereby allow spreads to widen on challenged sectors and imperiled credits?
The Fundamentals Point To The GREAT DELEVERAGING Of The Economy... Dead Ahead
Let's first look at the NYSE margin debt. According to the chart by the Advisor Perspectives, the New York Stock Exchange margin debt is at new record high:
As we can see, the NYSE margin debt (by traders) is nearly $600 billion versus $400 billion in 1999 and $450 billion in 2007. Which means the NYSE margin debt is 33% higher than the level it was right before the 2008 U.S. Housing and Banking collapse. If we look at the 1999 and 2007 NYSE margin debt graph lines (RED), we can spot a huge spike right before they both peaked. If this is the way it will happen in the current trend, then we will likely see a huge spike and stock market MELT-UP before it peaks and collapses.
You know.... the last chance for the really stupid traders to get SUCKED in.
So, as the NYSE margin debt reaches new record territory, so has the VIX Index and the stock market. Yesterday, the VIX Index (measures volatility in the markets) closed at a new record low of "9", while the Dow Jones Index ended the day at a record high of 24,922 points:
Today, the Dow Jones Index has reached another record at 25,100. Just like the cryptocurrency market, the only direction is HIGHER. Who knows how low the VIX Index will go and how high the Dow Jones will reach, but my gut tells me that this will be the year that the fun finally ends.
Of course, if we have new record highs in the stock markets, we should see the same with the U.S. Retirement Market:
According to the ICI - Investment Company Institute, the U.S. Retirement Market hit a new record at $27.2 trillion in the third quarter of 2017. I would imagine the U.S. Retirement Market will surpass the $28 trillion mark in 2018. When Americans feel rich via their investments, it makes them also feel good about buying more crap they don't really need or can afford.
You see, frugality has been totally erased from Americans' mindset. By being frugal, I am talking about being extremely wise and cautious about spending ones fiat currency. Being frugal is one of the most important aspects of a successful household. However, if frugality were reintroduced to Americans, then the entire economy would collapse overnight. Why? Because, the U.S. economic model is based on buying as much as we can on debt and credit. If we moved back to being frugal or buying only with cash, then 95-98% of the U.S. economy would disintegrate.
What is quite interesting about the U.S. stock and retirement market is that their values have skyrocketed while our energy consumption has remained flat since 2000. This wasn't the case from the 1950-2000 period. As U.S. energy consumption increased, so did the value of the stock market. This was also true for world GDP:
Global GDP growth increased in percentage in line with world oil production growth. However, it was different for the United States. While total U.S. energy consumption remained flat since 2000, the value of stock and retirement markets skyrocketed higher:
This chart shows total U.S. energy consumption in Quadrillion BTUs. As we can see, total U.S. energy consumption tripled from 35 Quad BTUs in 1950 to 99 Quad BTUs in 2000. However, total energy consumption has been virtually flat ever since 2000 while the value of the U.S. Retirement Market has increased from $11.6 trillion to $27.2 trillion and the Dow Jones Index has surged from 11,000 to 25,000 points currently. Both markets are up approximately 130% since 2000 while energy consumption is flat.
That is most certainly a neat trick by the Fed and Wall Street Banks. Of course, there will be individuals who say the value of STOCKS, BONDS, and REAL ESTATE can rise on flat energy consumption. They can say that because they are completely FOS.
When we look at the world in digital values instead of energy data, we can come up with virtually anything. The value of stocks, bonds, and real estate have been wildly inflated due to Central Bank money printing and the tremendous increase in debt. If an individual stayed awake during their economic classes in high school or college, NET WORTH comes from subtracting DEBTS from ASSETS. However, today... we don't worry about the debts. We only look at the assets. This is like eating all the junk food during the holidays and not worrying about the way it comes out the other end.
Americans have deluded themselves into believing that crap that is put on our dinner plate is good for us. So, why should we blame them if they forget about debts and only look at assets? It makes perfect sense when LIES and FRAUDULENT activity are the predominant ideology in society.
When The Markets Crack, So Will The Price Of Oil... and with it, The Economy
If you have been reading my analysis on energy, you would understand that oil is the KEY FACTOR to the health of our economy. It doesn't matter if we were to come up with some new energy technology like cold fusion or thorium energy reactors, they don't solve our LIQUID ENERGY PREDICAMENT. The world doesn't run on electricity; it runs on liquid oil. If you remember anything, that is one not to forget.
Regardless, I have looked over cold fusion and thorium reactors (along with many other "silver-bullet" energy-saving technologies), and they just don't work. Yes, I would imagine some individuals will send me information to the contrary, but the fact remains... our retail markets are based on the just-in-time inventory system. That system needs liquid fuels to function, not electricity. So, when liquid energy runs into trouble, the world economy runs into trouble.
While I have presented a lot of articles and analysis on the Great U.S. Shale Energy Ponzi Scheme, I am not going to focus on that today. Rather, let's look at the oil price and its dynamics going forward. As I have mentioned, I believe the price of oil will trend lower even though we may experience price spikes. My realization of the continued falling oil price came from the Thermodynamic work of Bedford Hill (TheHillsGroup.org) and Louis Arnoux. While some do not agree with the findings of The Hill's Group or Louis Arnoux, the only error I can see in their work is the timing of the Thermodynamic Oil Collapse. And that is really not an error as they stated their calculations are based on the "Average Barrel of oil." Thus, there is room for improvement of their model as well as a degree of accuracy... but not much.
If we look at the current oil price chart, it seems as if it is heading back towards $65 (200-month moving average-BLUE LINE) and then up to $100:
However, the COT Report (Commitment of Traders) shows a much different setup. The amount of commercial short positions in the oil market is the highest going back 23 years. Furthermore, the current 644,000 commercial short positions are even higher right before the price fell from $105 in 2014:
You will notice when the price of oil was at $105 in 2014, the commercial shorts (hedgers positions) were approximately 500,000 contracts. Today at $62, the current commercial short positions are 644,000 (the chart above is two weeks old). Furthermore, when the price of oil fell from $105 down to a low of $26 at the beginning of 2016, the commercial short positions fell to a low of 180,000 contacts. So, it looks like the oil price is being set up for one hell of a fall.
Now, the interesting part of the equation is this... will the oil price fall when the markets crack, or before? Regardless, if we look at all the indicators (VIX Index record low, Stock Market Record High, NYSE margin debt record high or commercial short positions on oil at a record high), we can plainly see that the LEVERAGE is getting out of hand.
These indicators and others give me the impression that the economy and markets are going to BLOW UP in 2018.
Moreover, this setup already took place in the market back in 1987. While I have written about this in a previous article, I wanted to show it using the oil price from 1984-1988. Very few people knew that the oil price dropped like a rock from $31 in 1985 to a low of $10 in 1986:
The decline in the price of oil from $31 to $10 was quite similar to what happened in 2014 when the price fell from $105 to a low of $26 in 2016. Also, the oil price recovery in both periods was quite similar as well. From July 1986 to August 1987 and from January 2016 to January 2018, the oil price (and economy) recovered. The oil price more than doubled from its low in 1986 ($10-$22) and 2016 ($26 to $62).
However, a few months before the infamous BLACK MONDAY Stock Market Crash on Oct 19, 1987, the oil price peaked and declined by nearly 20% ($22 down to $18). So, are we going to see a similar pattern this time around? Will the warning shot be the peak and decline of the oil price as it's currently being set up by the record amount of commercial short positions? These are all very good questions in which I have no answer, but clearly, history does repeat itself.
Either way, the indicators are pointing to one hell of a deleveraging of the markets. Investors need to understand when the oil price heads south once again; it will likely be the death-knell for the already weakened U.S. Shale Oil Industry. We must remember, when the markets were collapsing in 2008, the U.S. oil industry was still in relatively good shape. Today, most of the shale companies have debt up to their eyeballs. Once again, here is the chart of the coming ENERGY DEBT WALL:
The tactic used by the Shale Energy Industry was to take investor money and push back the PAYBACK as far as possible. The intent was to BAMBOOZLE as many SUCKERS as possible before anyone realized just how unprofitable it was to produce shale oil and gas. A perfect example of this is the poster child of what's wrong with the shale oil industry... Continental Resources.
Before Continental Resources embarked on the Great U.S. Shale Ponzi Scheme, the company only had $165 million in debt (2007) and was paying an annual interest payment (on their debt) of $13 million. Fast forward to today, Continental now has over $6.6 billion in long-term debt and will likely pay over $300 million in their interest expense this year.
This is precisely why Continental Resources announced the issuance of $1 billion in new Bonds so they could pay off existing ones that were coming due. And get this. The SUCKERS who purchased the $1 billion of new bonds, will not be paid back until 2028... LOL.
The POOR SLOBS that purchased those Continental bonds need to read about the Fiasco that happened to BHP Billiton when they blew over $50 billion of their investment in the wonderful U.S. Shale Ponzi Scheme.
I would like to remind investors that the definition of a PONZI SCHEME is to use new investor money to pay off existing ones. This is exactly what is taking place in the U.S. Shale Energy Industry. Because Continental has pushed back the payback period for ten years, they have received additional funds to continue the facade a bit longer. It is quite likely that Continental Resources will no longer be around in ten years to pay back that debt.
But why should that matter? Why should the CEO care about the debt if he made $millions and was able to sell most of his stock before the public realized what a worthless PIECE OF GARBAGE shale oil and gas have been?? Again, this is the fabric of our society. As long as some other SMUCK get's stuck with the bill...... who gives a RATS AZZ??
To tell you the truth, when the markets finally crack, and the real carnage rips through the U.S. economy, we only have ourselves to blame. There are no pointing fingers when we are all involved. Especially the Bitcoin and cryptocurrency fanatics. I hate to say it, but those who believe they are going to get rich on CRYPTOS so they don't have to work anymore...... let me provide you with my famous saying.
GOD HATH A SENSE OF HUMOR.....
Currently, the cryptocurrency that is now stealing the show is Ripple. Anyone who bought Ripple a year ago for $0.005 a piece is salivating on the profits they have in their account. I would imagine the BOOZE and MONEY SPENDING are really flowing. However, if you look at Ripple's chart and you don't see a problem.... you might want to check yourself in and get an MRI brain scan:
There's a lot more that I can say about Ripple and the other cryptocurrencies, but either you get it, or you don't. Those that don't get it now... will likely get it shortly. Unfortunately, the cryptos won't be the new technology that will change our world for the better. Rather, they will be another Tulip Mania that we can add to the growing list.
In conclusion, the U.S. and world economies are heading towards one heck of a crash. What happens when this occurs, it's anyone's guess. Likely, the Central Banks will step in with their magic and print money like crazy. However, this is not a long-term solution. If you haven't bought some physical gold and silver insurance yet and are waiting to time the markets, GOOD LUCK WITH THAT.