PROVIDING THE BIG PICTURE ON MACRO AND CREDIT SINCE 2009 Martin - - PowerPoint PPT Presentation

PROVIDING THE BIG PICTURE ON MACRO AND CREDIT SINCE 2009 Martin Tixier – Strategist

PLAN 1 2 3 4 5

EXECUTIVE SUMMARY THE RETAIL CROWD IS ON OVERDRIVE LIQUIDITY DOESN’T EQUATE SOLVENCY WATCH FED LIQUIDITY CONCLUSION

Private and Confidential June 2019

EXECUTIVE SUMMARY – 15TH OF JUNE 1

Private and Confidential April 2015

WHEN ROBINHOOD TRADERS ARE GIVING STOCK TIPS

MACRO THOUGHTS

“As the story goes, one day in 1929, Joe Kennedy is getting his shoes shined. The boy began to give stock tips as he polished Kennedy's oxfords. In that moment, it struck Joe that he needed to leave the market.”

• Since the lows of March, everything “high beta” has been on overdrive and US valuations

are increasingly looking lofty on the back of poor fundamentals thanks to the COVID-19

• nslaught. Rally has been epic in areas such as Russell 2000
• Cracks in in the market are appearing – From Hertz retail mania, to accounting fraud with

Wirecard which is typical of late cycle events, and now this: New Leveraged ETFs Own Leveraged Funds That Own Leveraged Companies

• We believe the market is at a critical juncture. It’s either more up or we see a break. It is

hard yet to see a catalyst apart from the usual “exogenous geopolitical risk” given the huge amount of liquidity sloshing around.

• Treasury balance at Fed is +1trln. so the correction in stocks could come a bit later we

think, maybe October in conjunction to a potential COVID-19 “second wave”.

Private and Confidential June 2019

THE RETAIL CROWD ON OVERDRIVE 2

Private and Confidential April 2015

THE RETAIL CROWD ON OVERDRIVE

• The net number of calls minus puts bought to open is now TWICE as high as the prior peak

in February.

Graph source - Sentiment Trader- Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• Kevin Warsh, former FederalReserve Governor, highlights an economy / finance contrast in

the Fed's policy approach.

• In addition to posing reputational and other risks for the central bank, this fuels bigger

concerns about the widening MainStreet / WallStreet disconnect…

• Last time GINI coefficient was sky high was 1929. So yes, here comes another bubble.

Graph source - Bloomberg - Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• The poor are getting poorer.
• The share of assets held by the bottom 50% has followed the Fed’s assets (inverted)

remarkably close.

• Monetary stimulus is severely amplifying the wealth gap.
• Wait until the Federal unemployment insurance runs out.

Graph source - Otavio (Tavi Costa) - Bloomberg - Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• But, options traders are still not betting against current rally in S&P…put/call open interest

ratio hovering near lowest level since Jan, while market’s continued to surge off 3/23 lows (notwithstanding today’s pre-market weakness) .

Graph source – Liz Ann Sonders - Bloomberg - Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• In our book rising correlations are a bad sign. It means that “diversification” will not play in

your favor when the market will turn. We think you need to start thinking “defense” after the huge rally, and the euphoric retail crowd going “all in”. .

Graph source - Bloomberg - Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• The “Dash” for “Trash”
• “A ‘garbage’ portfolio, an equal-weighted portfolio of all the listed US companies with a

credit default swap of more than 1,000 basis points as of 1 April, 2020. "

Graph source - Man Group - Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• A record breaking 56% of S&P 500 stocks are on a MACD sell signal now

Graph source - Sentiment Trader- Twitter Private and Confidential June 2020

THE RETAIL CROWD ON OVERDRIVE

• Corporate earnings are getting more disconnected from stock prices today. Earnings

dropped by 16% in Q1, the biggest drop since 2008, & are poised to fall again in Q2, yet the S&P has recovered most of its 34% plunge after setting a record in February.

Graph source - Bloomberg - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY 3

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LIQUIDITY DOESN’T EQUATE SOLVENCY

• A timeline of Fed actions in response to the Coronavirus crisis between January and June

2020:

Graph source – Twitter Macrobond Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• If you wonder just how 'abundant' #liquidity is, just take a look at US M2 Money Supply
• growth. At 23.1% it's almost 10 percentage points above the highest level ever recorded

before the Covid19 crisis.

Graph source – Twitter – Jeroen Blokland - Bloomberg Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• With the latest US JOBLESS CLAIMS coming at 1 508J vs 1 300k expected, fundamentals

continue to be very challenging for the “real economy”.

Graph source - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• A disappointing weekly report for jobless claims. While both initial and continued jobless

claims fell, the falls were far smaller than economists had expected. Ongoing claims remained above 20.5 millions in the first week of June

Graph source – Twitter – Macro Markets Daily Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• May housing starts much weaker than expected at +4.3% (974k ann.) vs. +23.5% (1.1m)
• est. & -26.4% (934k) in prior month … building permits also weaker than expected at 14.4%

(1.22m) vs. 16.8% (1.25m) est. & -21.4% (1.07m) in prior month.

Graph source – Liz Ann Sonders - Bloomberg - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• Credit Bubble? You bet !
• Total corporate liabilities as a proportion of GDP hit a record high *before* the pandemic

and emergency stimulus measures.

Graph source - CreditSights - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• This year's high-grade U.S. corporate-bond sales have already exceeded last year's total.

Graph source - Bloomberg - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• Both IG and HY are still experiencing massive downgrades with the Up/Down ratios of both

plummeting in Q2 for a YTD ratio of 0.17 and 0.09 respectively.

• For reference, Moody's up/down ratios for March 2008 to March 2009 was 0.18 for IG and

0.14 for HY

Graph source - Efficient Market Hype - Bloomberg - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• The face value of defaulted non-financial corporate bonds has jumped to $70bn in Q2 2020

—the largest on record, IIF says. US firms account for two-thirds of the total.

Graph source - IIF - Bloomberg - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• Leverage is on the way up as issuers have added debt while EBITDA has fallen & if 1Q stats

w/ only 1 month of COVID shutdowns are any indication, issuers are going to do a dance with agencies to maintain ratings.

Graph source - CreditSights- Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• This is a troubling picture to keep in mind.
• Economic activity vs financial conditions:

Graph source - CreditSights - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• A reminder of a slide from a June 2019 presentation on the “bubble“ in Commercial Real

Estate with prices now almost 50% higher than their 2008 peak.

• Action in CMBX series 9 and 12 shows that some players are still in “short” positioning

mode.

• The apartment vacancy rate in San Francisco rose to 6.2% in May, up from 3.9% only three

months ago

Graph source – Tracy Alloway – Nomura - Bloomberg - Twitter Private and Confidential June 2020

LIQUIDITY DOESN’T EQUATE SOLVENCY

• The pandemic’s CRE domino effect:

Graph source - Twitter Private and Confidential June 2020

WATCH FED LIQUIDITY 4

Private and Confidential April 2015

WATCH FED LIQUIDITY

• FED has been watching credit spreads so no wonder they are now playing the ECB

playbook and adding corporate debt to their balance sheet, but, again, liquidity doesn’t resolve solvency because the FED on it’s own cannot drive up Aggregate Demand (AD).

Graph source – FRED - Twitter Private and Confidential June 2019

WATCH FED LIQUIDITY

• Don’t fight the FED when it comes to “Credit Spreads”. An epic rally.

Graph source – Jeroen Blokland - Twitter Private and Confidential June 2019

WATCH FED LIQUIDITY

• The Fed is “putting a floor in this market. This is a market that investors can’t lose,”

President & CEO Jim Bianco says. “Now, I don’t believe that’s going to last forever and I think we’ll run into trouble down the line, but not now.”

Graph source – MS - SOBERLOOK- Twitter Private and Confidential June 2019

WATCH FED LIQUIDITY

• There is, was, and will be no flood of liquidity. Carmakers and just plain corporations aren't

buying it. Nor are foreigners. They sold the second most US$ assets on record (behind only March) in April. When the Fed's "flood" was at its highest.

Graph source – ALHAMBRA - Twitter Private and Confidential June 2019

CONCLUSION 5

Private and Confidential April 2015

CONCLUSION

• With € 1308bn allotted in the TLTRO by the ECB, the EUR liquidity tsunami is coming!
• Good for peripheral bonds and European stocks, not really an “impact” for the real

economy.

• The Quantity Theory of Credit proposes that increasing the allocation of credit money for

non-GDP transactions (transactions that do not increase GDP (gross domestic product)) will have no impact on economic growth, and will instead promote asset price inflation (Lyonnet & Werner, 2012, p. 95; Werner R. A., 2005).

• Though we continue to think we have a recipe for more “asset prices inflation”, the market

is at an important juncture.

• Meanwhile since March 23, 2020:
• Cyclical Total Returns:
• $XLE: +69%
• $XLI: +44%
• $XLF: +36
• BKX: +40%
• $ZROZ: -11% (Since March 9 Peak)

Private and Confidential June 2020

CONCLUSION

• Sobering look at growth in concentration of wealth ... net worth ratio of top 1% vs. bottom

60% has more than doubled over past 3 decades.

• This will not end well…rest assured

Graph source – Bloomberg - Twitter Private and Confidential June 2019

CONCLUSION

• Stocks with the lowest credit quality plunged 11% yesterday, more than double the 5%

slump seen in the highest-rated shares. High-yield U.S. stocks are down over 40% year-to- date while the highest-rated companies have gained about 9% this year.

• Dispersion is continuing to rise therefore you need to continue to be selective.

Graph source – Bloomberg - Twitter Private and Confidential June 2019

CONCLUSION

• Hard to believe…but looks like we are in a new bull market for global equities/assets that

has a long way to run.

• Chart suggests USD decline could be in motion as last time liquidity indicator exploded up

was after Plaza accord. Very rare data. Think out of the box.

Graph source – Bloomberg - Twitter Private and Confidential June 2019

BIOGRAPHY

• MARTIN TIXIER is the author and founder of the blog “Macronomics”

(http://macronomy.blogspot.com) launched in December 2009 and focusing on Macro trends in general and credit in particular. His blog is in the top 20 economic blogs in the United Kingdom (http://uk.labs.teads.tv/top-blogs/economy) and receives around 20,000 views per month.

• Mr. Tixier has served as Senior Fixed Income Investment Specialist in the asset management

industry for CANDRIAM, a leading pan-European multi-specialist asset manager managing €80B AUM at end of December 2014

• Mr. Tixier was awarded the highest accolade for a Six Sigma project in 2006 for Bank of

America where he worked 7 years in various positions. He won the coveted Best of Six Sigma Award (top 15 projects out of 1500 submitted globally).

• Mr. Tixier graduated from the top ranked ESSEC BBA as well as ISC in Paris where he
• btained a Master degree in Business Engineering and International Trade. Martin is a

certified CISI Level 3 FCA (Financial Conduct Authority) in Regulation, Securities and Derivatives and also has the ACI Dealing Certificate with distinction and is as well as a certified Six Sigma Green Belt.

• Mr. Tixier has also been lecturing at IAE Lille and Toulouse Business School for post

graduate students dealing on the subject of banking regulations and accounting practices and the role of credit in the economy as well as interest rates and credit trading strategies.

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