Nonfinancial corporates grew their stock of outstanding bonds by over 80 percent from Q4 2009 to Q4 2019, moving from 21.80 percent of GDP in 2009 to 26.62 percent in Q4 2019
Conversely, the domestic financial sector continued to delever, reducing its bond debt by almost 14 percent since 2009, which reduced the banking system’s systemic risk going into the COVID crisis
Foreigners are by far the largest holders of U.S. corporate bonds and, we suspect, the weakest hands and the most benefited from the recent Fed bond market bailouts
The Data
We look at the changes in level, profile, and ownership of the corporate bond market over two different periods with the Fed’s Flow of Fundsdata.
Conclusions/Data Inferences
1997 Q1 to 2007 Q4
The data illustrate the massive build in leverage in the domestic financial sector from 1999 to 2009, which was the primary cause of the GFC.
The stock of nonfinancial corporate bonds grew at a more modest CAGR at 4.1 percent during the same period, right in line with nominal GDP growth.
Foreign issues in the U.S. experienced significant growth though from a small base.
Overall corporate bond debt to GDP grew from 45.85 percent of GDP in 1999 to 64.57 percent by Q4 2019.
2009 Q4 to 2019 Q4
The U.S. domestic financial sector has been deleveraging since the GFC, reflected in the negative 14.3 percent growth rate in the sector’s bonds outstanding, which is one reason why the banking system was relatively strong going into the COVID crisis.
Conversely, nonfinancial corporates have grown their bond debt by over 80 percent to 41 percent of the corporate bond market and 26.62 percent of GDP, up from 21.80 percent in 2009.
Nonfinancial corporate bonds now make up the most significant percentage of corporate bonds outstanding in the U.S..
As we suspected in or January 2019 post, the diminished liquidity, or lack of traditional market makers, magnified the recent dislocation in the sector. Though not on such a massive scale, the buildup in nonfinancial corporate bond debt since 2009 mirrored that of the financial industry from 1997 to 2007, and resulted in a similar dislocation
Who Owns The Corporate Bond Market
Foreign holders of U.S. corporate bonds make up the largest ownership group subjecting the market to capital flight risk.
Life insurance companies are the most significant domestic holders of corporate bonds, taking down almost 22 percent of the outstanding stock of corporates.
Mutual funds are a close third followed by households, which include hedge funds.
Other makeup over 20 percent of corporate bondholders but each group is less than 5 percent of the market. They include state and local employee pension funds, banks, state and local governments, broker-dealers, ETFs, closed-end funds, among others.
The largest hands – foreign holders – are most likely the weakest hands. Another risk that wasn’t on the radar of most traders and investors when the COVID crisis began.
The market is going up because so many are caught offside betting it’s not going to go up. It also amazes us how so many retrofit their fundamental analysis or perspective of the economy to the price action. No, not everything is awesome and the market is priced for awesome.
Moreover, not a good look if the stock market is close too highs and unemployment is pushing 15 percent. Ya’ know, the rich v. poor thang.
Then there is the social equity of the massive bailouts in such a scenario. Just imagine the politics of that scenario come November?
The rollover will most likely come when shorts get back on side.
We’re happy with cash and gold sitting on our couch dreaming of Waikiki. We’ve experienced too many nut cracking squeezes. Not fun.
Who would of thunk that one of the world’s most valuable and glamorous sports franchises, worth $4 billion, would be getting money earmarked to help small biz survive, before my good friend, the Italian Stallion, and restauranteur, who still can’t get any money?
Watch the CEO of Nordic American Tankers (NAT) quote Cramer $70k per day to lease an oil tanker. Buy spot/sell forward and that arb should drive the forward/futures premium relatively close to the cost of carry.
Here is something we suspected for some time and now has been measured by the FT analysts.
The noisier the data, it is best to focus on trends and not single data.
The death toll from coronavirus may be almost 60 per cent higher than reported in official counts, according to an FT analysis of overall fatalities during the pandemic in 14 countries.
Mortality statistics show 122,000 deaths in excess of normal levels across these locations, considerably higher than the 77,000 official Covid-19 deaths reported for the same places and time periods.
If the same level of underreporting observed in these countries was happening worldwide, the global Covid-19 death toll would rise from the current official total of 201,000 to as high as 318,000.
To calculate excess deaths, the FT has compared deaths from all causes in the weeks of a location’s outbreak in March and April 2020 to the average for the same period between 2015 and 2019. The total of 122,000 amounts to a 50 percent rise in overall mortality relative to the historical average for the locations studied.
In all the countries analysed except Denmark, excess deaths far outnumbered the official coronavirus death tolls. The accuracy of official death statistics from the virus is limited by how effectively a country is testing people to confirm cases. Some countries, including China, have retrospectively revised up their death tolls from the disease. – FT
Death Curve
Two-thousand American deaths per day (7-day rolling average) are unacceptable even though the U.S. curve has flattened out. That’s a 9/11 disaster happening every day on average.
New Case Curve
Wow, look at New Zealand and Australia. Don’t think these curves are normalized to take into account the rate of testing differentials for each country. Beware of that distortion.
We are growing increasingly bearish on America’s prospect to arrest the spread of COVID-19 due to growing restlessness over the shelter-in-place rules leading to quarantine fatigue, weak political leadership, and lack of uniform measures to mitigate the spread across, and within, all fifty states.
This increases the probability that only herd immunity, 60-70 percent of the U.S. population being infected, will arrest the coronavirus
That would put COVID deaths north of 600k, which is a very generous and optimistic estimate
There is no hope of an economic recovery anytime soon in that kind of scenario and puts the timeframe of the COVID crisis at just about two outs in the bottom-of-the-first inning in a nine-inning battle
This almost ensures a prolonged depression
This could change if America, which is currently acting like a failed state, could find a way to unify and bolster its will to fight the virus
THOUSANDS of people in California flocked to the beach Friday as the state endured a heatwave — despite the state’s stay-at-home orders meant to prevent the spread of the coronavirus.
Amid the global pandemic that’s killed more than 1,600 people in the Golden State, an estimated 40,000 people hung out at Newport Beach and thousands of others spent time at Huntington Beach. – U.S. Sun
This is distressing. Our generation(s) are failing its big test, which almost ensures a prolonged economic depression.
Quarantine Fatigue
Researchers tracking smartphone data say they recently made a disturbing discovery: For the first time since states began implementing stay-at-home orders in mid-March to limit the spread of the novel coronavirus, Americans are staying home less.
The nationwide shift during the week of April 13 was relatively slight. However, any loss of momentum, particularly when stay-in-place orders remain in effect across most of the country, has some public health experts worried about “quarantine fatigue.” Any increase in travel, they say, is premature when staying home remains the most effective way to limit the spread of the virus until widespread testing and contact tracing become available. – Stanford Advocate
Newport & Huntington v Omaha Beach
Sacrificing the beach to sit at home on the couch and watch reruns of the Dodgers and Lakers is hardly a test. How long would we have lasted on the beaches of Normandy and the stress of the Great Depression? That beach in the above picture is hardly Omaha beach and those on the beach are not exactly patriots storming the beach, though we are empathetic to thier plight, even if LA is in the midst of a record-breaking heatwave and the Orange County beaches are open for business.
Our lack of discipline, some of which is the result of failed political leadership, is only going to prolong the health and economic crisis. A double-minded country is unstable in all her ways.
If sitting on the couch awhile longer to protect the last few of the Greatest Generation and America’s vulnerable is too big of a sacrifice then, “Houston, we have a [big freaking] problem.” COVID has exposed some very big cracks in American society.
If you want to go to the beach that’s fine as long as it doesn’t put others at risk. But it does, not only your immediate family but entire communities and the country.
Please watch the video again to see how just one bozo’s day at the beach can infect an entire communi
GMM’s Libertarian Roots
We are, at heart, libertarians, believe in limited government, and that the private sector is what creates the nation’s wealth and increases its citizens’ standard of living. There is a role of government in our world, however, when markets fail, supporting public goods, and mitigating private behavior externalities, including providing a strong safety net for the most vulnerable.
Our perspective on most social issues is summed up in the following phrase, which has been oft attributed (we could not document) to Rosseau, John Stuart Mill, Oliver Wendall Holmes Jr, and Abraham Lincoln,
Each side takes the position of the man who was arrested for swinging his arms and hitting another in the nose, and asked the judge if he did not have a right to swing his arms in a free country. “Your right to swing your arms ends just where the other man’s nose begins. — Harvard Law Review, “Freedom of Speech in War Time,” June 1919
In today’s context, “your right to go to the beach ends where it increases the risk of killing your neighbor.” In economist speak, if your personal freedom results in negative externalities, which impose on my rights and liberties, the governing authorities should impose limits or attempt to mitigate the damage.
Herd Immunity
It looks like, with no vaccine in sight and no unified discipline across all 50 states, and woefully weak political leadership, herd immunity is going to be the end game. That is 60-70 percent of the population needs to be infected before the virus stops burning through America. Very sad.
We’ve put together some back of the envelope calculations in the following table based on simple assumptions that 5 percent of America’s population is currently infected, which drops the concurrent mortality rate down to 0.32 percent, very generous compared to the 2 percent estimate that holds with the conventional wisdom.
Using that mortality rate, assuming 60 percent of the American population is eventually infected, the death toll will rise to 641,000, which puts us in about two outs in the bottom of the first in a nine-inning baseball game.
If you think the economy can recover as the death toll marches toward 600k, well, you need to inject some bleach into your brain.
Don’t take our back-of-the-envelope estimates as a scientific epidemiology model.
According to the Tracking Project’s figures, nearly one in five people who get tested for the coronavirus in the United States is found to have it. In other words, the country has what is called a “test-positivity rate” of nearly 20 percent.
That is “very high,” Jason Andrews, an infectious-disease professor at Stanford, told us. Such a high test-positivity rate almost certainly means that the U.S. is not testing everyone who has been infected with the pathogen, because it implies that doctors are testing only people with a very high probability of having the infection. People with milder symptoms, to say nothing of those with none at all, are going undercounted. Countries that test broadly should encounter far more people who are not infected than people who are, so their test-positivity rate should be lower.
…“We just haven’t tested enough people yet,” he said. “If you were doing random screening of the whole population, we just don’t know what you’d see. We don’t know how many asymptomatic viral shedders are out there.” As such, he advised extreme caution in using the rate—but being cautious about data, he added, “is my job.” – The Altantic
Does Sheltering In Place Work?
Ab-so-freaking-loot-ly!
Take a look at the Bay Area’s curve compared to the rest of the country.
Those charts are similar to the studies of 1918 Flu, which, say, compared the death curves of St. Louis, who locked down almost immediately after the first cases showed up, to those of Philadelphia, who finally got the memo about three weeks later. See our post, Meet Me In St. Louis Not In The Streets Of Philadelphia.
Upshot
We own the future, folks. Either we follow the scientific and medical community’s advice and try and shut this virus down ASAP by every American doing their patriotic duty or we follow our own conspiracies, “Jesus is my vaccine” nutter, anti-Christian views, and let the political forces divide us. That almost guarantees a prolonged depression.
Though the polls show overwhelming support for strict shelter-in-place measures, overwhelming in not enough. We need almost 100 percent unanimous buy-in in from all the states. As the video above illustrates, a little yeast can permeate the whole batch of dough.
We have a good friend who was wearing a face-mask at the grocery market in a northern mid-west state the other day encountered the mockery of some of the local shoppers,
“You are such a libtard.”
In our book, it’s always better to be a healthy and alive “libtard” than a sick and dead…whatever. Death comes for libtards as well as the enlightened few and cannot be gaslighted.
We will share in a post soon about a conversation we had back in early February that confirmed to us the country was in deep shit.
“Capitalism as we know it will likely be changed forever.” Here are some of the “lasting implications” investor Leon Cooperman sees from the coronavirus crisis. https://t.co/JIUDFQ30FWpic.twitter.com/vdwgy3lYPn
Global Macro Monitor 