Animal agriculture is the leading cause of deforestation, water consumption and pollution, is responsible for more greenhouse gases than the transportation industry, and is a primary driver of rainforest destruction, species extinction, habitat loss, topsoil erosion, ocean “dead zones,” and virtually every other environmental ill. Yet it goes on, almost entirely unchallenged. Here is a direct video link.
High yield corporate bonds and stocks traditionally move in close correlation over full market cycles. When valuations are high, so is the downside to capital in both. This chart since 2006 of US high yield bond prices (HYG in green) and S&P 500 stocks (in red), offers some context over the past decade.
High yield prices began to plunge in late 2006 as the subprime bomb blew. Stocks joined the descent late 2007 to early 2009. By the bottom, high yield bonds had lost an average of 38% and the S&P 500 55%. Both then rallied two years, before slumping afresh with global revenues in mid 2011, and rallying into 2013 on QE ‘liquidity’. That was then.
Since 2013, high yield bonds have been diving (down some 18% so far) even as the S&P 500 managed to limp higher into mid-2015 on ‘FANG’ fumes (Facebook, Amazon, Netflix and Google).
High yield bonds broke below their 2011 support line last fall (horizontal green band above) and so far continue to drop as 2016 brings rising defaults and write-downs.
One has to wonder if equity prices will stick to their usual pattern and follow suit. Just following HYG’s lead to the 2011 support line (pink band above) would be -40% for the S&P from current levels. And as shown above, high yield debt has not bounced at the 2011 lows. Food for thought.
US leadership candidates like Cruz and Clinton imply business as usual for corporate welfare and Wall Street. But Trump (who talks about getting rid of carried interest and tax loopholes) and Saunders (who says breaking up the finance cartel is top of his to do list), present wild card threats. The tight race in Iowa last night, offered the status quo no reassurance.
At the same time, the traditional power of the oil lobby is also under threat (BP and EXXON tanking with crude this morning, as the Saudis signal a willingness to dig in for the long haul, raising capital if necessary via their first ever bond float).
And on the monetary policy front, Central Banks have deservedly lost the hearts and minds of thinking people everywhere.
In short, the presumptions on which the world has been run the past 30 years, are disintegrating under asset markets that have been overly-complacent and confident. Suddenly participants are having to face the risk and uncertainty that real families and small businesses feel in their bones everyday. This revelation and necessary repricing are long overdue. (You can tell someone is living in the alternative reality, theoretical world, with no actual understanding of risk, when they talk about markets or business needing or waiting for ‘certainty’. Good luck with finding that!)
John Mauldin articulates the growing angst well this week in Tokyo doubles down:
“In the world of the leading economists and central bankers, “everyone” believes what “everyone” knows to be true. All their research agrees with them, and any that doesn’t is labeled as flawed. Any empirical evidence that shows quantitative easing hasn’t been working is ignored or explained away, even when it is presented by outstanding academic economists. No, quantitative easing didn’t work because we didn’t do enough of it. Negative interest rates aren’t working because we haven’t gone low enough.”
As does John Hussman in his latest missive yesterday, The gas pedal is useless when the spark plugs are gone:
“All of this madness goes back to Ben Bernanke, who is the intellectual architect of quantitative easing, and who successfully encouraged Japan to pursue this policy n 2000. Thoughtful, informed policy is typically conducted within a carefully considered “range” having reasonable upper and lower bands. Bernanke’s abandonment of every such bound has produced policies that are, quite literally, deranged.”
Cory’s Chart Corner
