미국 경제의 위기신호, 어디서 오나?

[프란치스코]

The US economy is at risk, and the warning is coming from 'the lowest of the low'

A dark corner of the bond market is sending a warning sign about the economy.

"If our analysis is correct, today's elevated level of US investment-grade and high-yield credit spreads will persist, and default rates may rise materially through 2016," UBS's Stephen Caprio said on Wednesday. "The implication for the US economy is that wide credit spreads and ascending downgrade and default risks will increase borrowing costs for US corporates. This signals a downside growth risk to the US economy."

This story is not just about junk bonds. It's about the junkiest of junk bonds and what they're predicting for bank lending, which is critical for job creation.

Let's take a breath and unpack this for a second.

What are junk bonds and why are spreads are blowing out?

Market-watchers have pointed to the recent spike in high-yield bond spreads and noted that this is the kind of move that happens as an economy goes into recession.

The high-yield bond market is particularly sensitive to economic cycles. Commonly referred to as junk bonds, these debt securities are issued by companies with low credit quality. Because of the higher risks that come with lending to such companies, they have to offer higher yields than those of their investment-grade peers. When spreads increase, it's costing more for these junk corporates to borrow.

"US high yield credit has faced one headwind after the next – from significant distress in Energy, to risks of weakening global growth, to significant uncertainty around Fed rate hikes," Morgan Stanley's Adam Richmond said on Friday. "As a result, HY just posted the weakest four-month stretch (Jun-Sep) since the end of 2008, -7.03% in total return. This selloff has driven very negative sentiment, as nothing brings the bears out of hiding more so than low prices, feeding into panicky price action in markets."

.

"The simple point – it doesn’t happen often – only shortly before recessions or during major growth scares," Richmond said.

Now, the first caveat everyone points to is high-yield energy, which has been getting slammed by the effects of low oil prices. Indeed, if you take the energy companies out of the picture, spreads in the rest of the junk bond market are much more subdued.

But UBS's Caprio sees a bit more to the story.

"This is not just an energy story, but a broader conversation about the credit cycle and our place in it," he said.

The "lowest of low quality issuers" are sending a warning sign.

Caprio thinks we're heading for a period of tighter, more expensive money. In a note to clients on Wednesday, Caprio observed that what happens in non-bank lending markets like the bond markets lead what happens in bank lending.

He honed in on a segment of the junk bond market.

"Our analysis suggests it is actually the lowest of low quality issuers (B-rated and below) that provides the first leading signal that credit stress may lie ahead, as Figure 3 illustrates," Caprio wrote. "Worryingly, this chart is flashing red. While BB net issuance has held in quite well, B-rated and lower net issuance has plunged in a replay of late 2007, as investors cut back in the face of growing default risk and rising illiquidity."

"And stripping out the energy sector from this chart makes no difference; ex-energy low-rated issuance is drying up too," he added.

.

Caprio goes into great detail regarding what's going on here and what the implications are. But we'll fast forward to the nut of the argument.

What's happening in this "lowest of the low" corner of the argument is just a preview of what banks are going to do when businesses and consumers come asking for loans.

As a proxy for bank lending, Caprio points to the percentage of banks tightening lending standards according to the Fed's Senior Loan Officers Survey (SLOS). (UBS chief economist Maury Harris has long argued this measure is a reliable indicator of job creation.)

Caprio observed  that market activity in bonds B-rated and lower – a proxy for non-bank lending – predicts where the SLOS is going. From Caprio (emphasis added):

"What do our non-bank measures tell us about the future level of bank lending, and ultimately credit spreads and defaults, per our model framework? Utilizing quarterly data back to 2001, we build a model that predicts SLOS based on the level of the CMI index and low-quality HY bond net issuance (Figure 10). The fit is good (R-squared of 68%) as we expected, highlighting that bank and non-bank liquidity evolve similarly through time. However, we would note that our non-bank liquidity measure generally leads our bank liquidity measure by one quarter. The exception is during the financial crisis, where the banking sector was clearly the epicentre of the problem. The implication of this model is that bank lending will tighten from a healthy 6% of banks easing standards in Q2'15 to 14% of banks tightening standards in Q3 '15. This would be a significant move; these levels would imply HY defaults near 4.8% by Q3'16, even without accounting for specific stresses impacting the energy and materials sectors... 

Here's what that relationship looks like.

.

While all that sounds bleak, Caprio thinks it could be a lot worse.

"On the positive side though, we believe further spread widening would only be warranted with a systemic-type event, likely originating from even lower commodity prices, a renewed strengthening of the dollar, or a further deterioration in EM growth," Caprio said.

Still, Caprio's base case is for tighter financial conditions.

"In sum, we believe that non-bank lending standards illustrate an overall tightness in US financial conditions that signal a downside growth risk to the US economy," Caprio said. "While bank lending standards are healthy, we ultimately believe this misdiagnoses the pulse of the corporate credit cycle. Nearly all of the additional financing provided to nonfinancial corporates has come from non-bank sources, post-crisis. And expecting the banking system to meaningfully pick up the baton from a non- bank slowdown is unrealistic in today's highly regulated environment. In short, non-bank liquidity has been the main driver of the corporate credit cycle post-crisis, and there are now early signs that it is evaporating."

To close, we'll note that tighter financial conditions make it less likely that the Federal Reserve will tighten monetary policy imminently. This may alleviate some of the concerns above. Or maybe it just won't exacerbate them.

.

(Sam Ro, Business Insider)

/

/

It's time to start talking about a US recession

Perhaps it's time to stop referring to it as the "r-word."

We're talking about "recession."

On the whole, the torrent of US economic data has been pretty good since 2009, which is when the last recession ended. From the labor market to the stock market, the trend has been growth.

Lately, however, Wall Street pros from Citi's Willem Buiter to Societe Generale's Albert Edwards have increasingly folded "recession" into their discussions.

Indeed, there are troubling signs that the upward trends may be coming to an end and the start of recession is nearing. Remember: recessions don't begin when times are bad; they begin while times are still good.

Bloomberg's new survey of economists' recession expectations picked up for the first time in 14 months on Friday. Economists were asked the likelihood of a recession in the next 12 months, and the median came in at 15%, the highest since October 2013.

"We tend to have recessions every seven years, more or less in the United States, since World War II,"David Rubenstein, CEO of The Carlyle Group, told Bloomberg TV. "So at some point in the next year or two or three, you can expect a recession."

We compiled some of the warnings signs that have people fearing a recession is near. For what it's worth, we threw in a few reasons why the worrywarts have the story wrong.

.

All signs show US manufacturing is slowing quickly.

Chicago's manufacturing PMI is already signaling contraction in the Midwestern US.

The Philadelphia Fed's current activity index took a nosedive in September.

The NY Fed's manufacturing report also confirmed fears.

Dallas Fed's manufacturing report has been ugly for months in the wake of the oil price crash.

All in all, signs point to a recession in US manufacturing.

According to analysts at TD Securities, the outlook for manufacturing is gloomy, and the sector is in a recession. "The manufacturing sector has been like a sore thumb for the US economic recovery lately," TD wrote Wednesday. "Since last year, this crucial sector has struggled to navigate against the headwinds coming from the collapse in global energy prices, the drag from the strengthening dollar on export activity and the weakening in global demand."

.

Export growth has tumbled downward.

The trade gap has drastically widened, and its hacking away at GDP.

The Atlanta Fed's GDP Now tracker just slashed its forecast for the third quarter.

The September jobs report was a flop, and it extended a downward trend.

The amount of people in America's workforce is the lowest its been in 38 years.

Meanwhile, wage growth has made no meaningful upward climb, contrary to expectations.

Gallup's consumer economic outlook is sliding downhill.

Earnings growth for the companies in the S&P 500 have been negative for 2 straight quarters, which rarely happens outside of recessions.

The stock market is also throwing up warning signs. Expectations are that earnings per share for S&P 500 companies will decline for the second straight quarter when reporting begins in earnest next week, the first time that has happened since 2009. For some analysts these weak underlying growth trends are worrying for the broad economy. "Many seem to celebrate the absence of a recession," said Deutsche Bank's David Bianco in an email to Business Insider. "The labor market continues to tighten, and thus I expect the Fed to hike, but other than some bright spots like auto and housing, growth is extremely weak with underlying drivers like productivity and investment disturbingly poor and S&P profits are not growing."

.

A drop in company profit margins like we're currently experiencing has only happened without a recession once.

Contracting profit margins and earnings are bad news for stocks, which are already trading a rich valuations.

Recessions are brutal for stocks, especially when valuations are high. Prices plunged in every recession but one.

"Of the nine market declines associated with recessions that started with valuations above the mean, the average decline was -42.8%," Advisor Perspectives' Doug Short observed. "Of the four declines that began with valuations below the mean, the average was -19.9% (and that doesn't factor in the 1945 outlier recession associated with a market gain)."

.

But before you head for the hills, there's good news.

Regarding manufacturing, it's a relatively small portion of GDP, so its downturn doesn't signal total doom for the economy.

Auto sales remain at decade-long highs and are still climbing. This is a reliable sign of robust consumer confidence.

And weak monthly payrolls are no reason to fear. Weekly unemployment insurance claims are a sign the labor market is very healthy.

According to the folk who compute recession probabilities, the recession probability still is incredibly low.

TD Bank's recession probability model also says a recession is unlikely.

.

Ultimately, we'll only know in hindsight. 

Remember, recessions start while things are still good. It's just a turning point.

The National Bureau of Economic Research, the folks who officially date recessions, usually informs us that we've gone into a recession around six months to a year after it starts.