Credit Warnings Piling Up

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Lawrence McDonald is the New York Times Bestselling Author of “A Colossal Failure of Common Sense”  – The Lehman Brothers Inside Story  – one of the best-selling business books in the world, now published in 12 languages – ranked a top 20 all-time at the CFA Institute.

The Fed is promising $1T of quantitative tightening over the next 12 months?  Who are they kidding?!

Leverage finance markets are near frozen. Only two junk bonds have priced in May in the U.S high-yield bond market. There are no deals currently in the pipeline, per institutional clients in our live chat on Bloomberg.

“The Fed intends to aggressively normalize monetary policy, with simultaneous rate hikes and an ambitious balance sheet runoff schedule. The goal of the Fed is to dispel the growing belief in the markets that the Fed is behind the curve and inflation is becoming anchored in the economy. We believe that the Fed can maintain this aggressive pace of QT only for a very short period. We base this on the shadow Fed Funds rate, which incorporates both QE and interest rates, and the most recent experience with QT in 2018. In that period, the Fed could only maintain full-on QT (rate hikes + balance sheet runoff) for one quarter before it had to reverse course.

The Fed has proven itself OVER and OVER and OVER again to have misjudged financial conditions and financial stability risks. They routinely over-promise and underdeliver because they are clueless academics who have NEVER taken professional risk, never actually sat in a risk-taking seat, and are FAR more comfortable talking up meaningless, BACKWARD looking economic data. Their pawns on Wall St. (Timiraos at the WSJ, Goldman’s Hatzius, the financial media – sell-side sheep complex) only embellish the endless lines of bs. If you measure credit risk, counterparty risk, and financial plumbing conditions, in a very short period of time – if what has been transpiring over the last few weeks continues – the FED WILL break something. We were lectured, 25, 25, 25, then 50, 50, 50 then 75, 75, 75. All with $1T of QT in 12 months. This is a total bs overdose. The Fed must use hot air and their pawns effectively because, in reality, they cannot achieve anywhere near what they are “sales pitching” without creating another Lehman-like event. The Fed is starring down two barrels – 1) accept a higher level of normalized inflation 4-6%, slower growth stagflation or 2) Blow up the global financial system – this is a screaming buy for hard assets.”

“Beware of the Fed´s Pawns” – May 2022

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Just Three 25bps Rate Hikes have Delivered a lot of Stress
Always watch tertiary credit in a crisis. CCCs are out across 12%, after seven straight weeks of losses. Financial conditions are tightening far faster than the Fed realizes.  The funding window has shut down. Per Bloomberg, this month is on track to the slowest May since the global financial crisis of 2008. The year-to-date volume stood at $55.3b, a drop of 75% from the comparable period last year. Quality names are taking a beating – the average investment-grade corporate bond spread is at +150 basis points, the highest since July 2020. Credit markets have a veto on your plans Mr. Powell.

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Institutional investors can join our live chat on Bloomberg, a groundbreaking venue since 2010 – now with clients in 20+ countries, just email tatiana@thebeartrapsreport.com – Thank you.

Lawrence McDonald is the New York Times Bestselling Author of “A Colossal Failure of Common Sense”  – The Lehman Brothers Inside Story  – one of the best-selling business books in the world, now published in 12 languages – ranked a top 20 all-time at the CFA Institute.

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Consumer Staples are Screaming “Recession”

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Institutional investors can join our live chat on Bloomberg, a groundbreaking venue since 2010 – now with clients in 20+ countries, just email tatiana@thebeartrapsreport.com – Thank you.

Lawrence McDonald is the New York Times Bestselling Author of “A Colossal Failure of Common Sense”  – The Lehman Brothers Inside Story  – one of the best-selling business books in the world, now published in 12 languages – ranked a top 20 all-time at the CFA Institute.

Capital Flows into Staples XLP Don´t Lie
What is one of the most reliable recession indicators of all? Altria, Proctor and Gamble, and Coca-Cola are XLP (Consumer Staples) Names vs. Tesla, Amazon, GM, McDonald’s, Starbucks, and Home Depot — the XLY (Consumer Discretionary) Names – The faster the while line is moving south – the more likely recession is here – see recessions in red above. Technology stocks’ relative valuation premium to consumer staples peers has plunged, reflecting a switch out of expensive equities toward more defensive and stable shares. Per Bloomberg – the MSCI World Information Technology Index is now trading at about 20x forward earnings, a similar level to its consumer staples peers, a dramatic contrast to the premium of as much as 50% seen since 2019. Fund managers are now the most overweight staples relative to tech since December 2008, according to BofA May fund manager survey.  US consumers are already leaning on leverage (credit cards) to fund spending, and not just reaching into their savings, says Goldman.

Year to Date

Staples XLP +1%
Discretionary XLY -25%

One Year

Staples XLP +11%
Discretionary XLY -9%

May 18: Target Equity Falls nearly 30%, TGT is Close to 3% of the XLY Consumer Discretionary ETF

Target CEO – “In our other three core merchandise categories, Apparel, Home, and Hardlines, we saw a rapid slowdown in the year-over-year sales trend at the beginning of March, when we began to annualize the impact of last year’s stimulus payments. While we anticipated a post-stimulus slowdown in these categories and we expect the consumer to continue refocusing their spending away from goods and into services, we didn’t anticipate the magnitude of that shift.

Target Chief Executive Brian Corne

Reminder – Fed academics are promising 14 rate hikes including $1T of QT into a colossal fiscal drag. Think deficit spending of $2800B in 2021 vs. $700 – $800B in 2022??? This is one large experiment, they have no clue. Too many variables!

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Institutional investors can join our live chat on Bloomberg, a groundbreaking venue, just email tatiana@thebeartrapsreport.com – Thank you.

Lawrence McDonald is the New York Times Bestselling Author of “A Colossal Failure of Common Sense”  – The Lehman Brothers Inside Story  – one of the best-selling business books in the world, now published in 12 languages – ranked a top 20 all-time at the CFA Institute.

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