Oh the irony. Poor young Greta Thunberg was invited to speak at Davos. She may have wanted her audience to panic but it might have been better for her to focus outside her window on landing so she could see the utter hypocrisy of those she was addressing and their chosen mode of transport – 1,500 private jets.
Still, like the UN COP summit just past, we are supposed to believe that a 16yo has all the answers. Why go to university? What is the value in further education if a kid not even out of high school is smarter than all the adults in the room?
What a farce. The word “panic” says it all. It is hard to know who to believe. Thunburg? Alexandria Ocasio Cortez has only given us 12 years to live. Even The Pentagon wrote a report in 2003 that suggested by 2020 climate change would cause nuclear war, famine and natural disasters costing millions of lives. Not long to go til we get confirmation.
What was this narrative that the UK would plunge into the abyss with Brexit!? Something about corporate Britain being all confused and panicked about what to do with respect to the coming slow and painful death? Keep calm and carry on?
The Dow plunged 1175 points (-4.6%) overnight. 4.6% is a lot and yes 4-digit drops optically look worse but off the higher base we get higher (record) point drops. One thing to contemplate in a rising bond yield market is corporate credit quality. Since 2006 the average credit ratings for US corporates issued by the big agencies have seen the number of top rated (to the left) fall while those with deteriorating grades (to the right) soar. That’s right, the 4 categories before “junk” have risen sharply. After many years of virtually free money many corporations have let the waistline grow. When refinancing comes around just how will credit ratings influence the new spreads of corporates who’ve shifted to the right?
The IMF highlighted in 2017 that US companies have added $7.8t in debt & other liabilities since 2010. The ability to cover interest payments is now at the weakest level since 2008 crisis.
This despite near full employment, record level equity markets and every other word of encouragement from our politicians.
However if this is the state of the corporate sector at arguably the sweet spot of the economic cycle CM shudders to think the state of potential bankruptcies that will come when the cycle truly takes a turn for the worse. This is a very bad sign.
As a reminder in markets selling off in recent days, please find a report which touches on the extra volatility created by ETFs on the downside that amplifies market sell offs.
An excerpt of the report is as follows;
“CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index…The point Mr Fink is driving at is…the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.”