BIS Issues A Warning On U.S. Corporate Debt…

A Pfennig For Your Thoughts

March 6, 2019

* U.S. ISM jumps higher and the dollar bugs celebrate…
* U.S. Budget Deficit sees reductions in receipts… uh-oh!

Good Day… And a Wonderful Wednesday to you! Spring has come to S. Florida, as the temps have dipped and will only be in the 60’s today… but spring won’t last long, as the sunny and 80’s will be back in a day or two… The new hitting coach for my beloved Cardinals has received a rude awakening to the major leagues, as his batters can’t seem to find a groove early in spring training… UGH! One of these days I would love to put together a lineup for a major league baseball game… Now, that would be a hoot! I’m going to attempt to be upbeat today, but with what’s going on with the currencies and metals, it will be difficult at best! Jethro Tull greets me this morning with their song: Locomotive Breath… Old Charley stole the handle and the train it won’t stop going no it won’t slow down…

That’s basically how it feels for the currencies and metals these days, as if someone stole the handle, and they’re on a runaway train going south… UGH! The euro fell below 1.30 yesterday, In Australia they reported softer growth numbers, and the Aussie dollar, (A$) got whacked… And Gold.. eked out a small gain, but in reality, these small gains should be much larger… But they aren’t, and the old saying about it is what it is, holds true here…

Speaking of Gold… and Silver, of course… I read where the COMEX and the LBMA are out of physical metals… The paper trades should be drying up soon, folks… I’ve always told you that when enough physical Gold & Silver was being bought by the masses, that the paper trades would be squelched, and it looks like we could be heading there… That is if the communique from the GATA folks, is bang on with their call…

So, yesterday, the dollar rallied because the ISM Manufacturing Index rose after a few months of slippage… The reading was for January, which is pretty stale in my books, but traders found the data to be of their liking, and rewarded the dollar for the stronger print… I find the print questionable at best… All the data from late November though today, has been weak and getting weaker all the time… Shoot Rudy, the CAPEX (Capital Expenditures) have been negative 4 of the last 5 months… So, doesn’t that make this report on manufacturing suspicious? I’m just saying…

The Bond guys didn’t fall for the old (pump up the data trick) and bond yields dipped a few basis points yesterday. I keep telling you that I learned very early in my career to pay attention to what the bond guys are telling us… Hint, hint…

On a note where it will lead to another brick in the wall… The Bank of International Settlements, issued a warning yesterday regarding Corporate debt… The FT.com reported this… “Under reasonable assumptions, a return to 2009 downgrade rates could force portfolio rebalancing in excess of daily turnover in corporate bond markets.” – BIS
What they’re saying here folks, is that with the debt pile up that the Corporations have made that downgrading their bonds could lead to a HUGE selling by funds, etc. that need to hold higher rated bonds in their respective portfolios…

I’ve ben talking about these leveraged loans that Corporations have made into bonds, and it’s quite scary, especially if such bonds begin to get downgraded…

But apparently, only a handful of analysts, including myself, are worried about this developing into the snowflakes that would cause an avalanche on the U.S. economy… The markets don’t care, traders don’t care, investors don’t care, they are all wearing rose colored glasses, and allowing the bad data prints to roll off their backs… And that’s what makes this all so scary folks… Like I said, only a handful of people are looking at this and placing it on the worry wall, so that when the avalanche occurs, all those people that didn’t pay attention to this snowflake, will be hurt financially… I sure hope I’m wrong on that one… It is just my opinion, folks, and I have been wrong before, but usually I’m right, eventually…

Well, the Trade Talks continue, and now there are things being leaked about the agreement that don’t sound like China took too big of a hit… I’m so pessimistic about these Trade Talks, folks, that I get jaded about them… Maybe they’ll be everything the U.S wanted, and more… Maybe… But I doubt it, and in fact, I’m going to go out on a limb here and say that the 200 pound gorilla in the corner of the Trade Talks room is “Intellectual Property”, of which is the main reason we’ve gone down this rabbit hole of a Trade War… And here where I go out on the limb, so pay attention… Intellectual Property won’t be a part of the agreement…

OK… remember the first summit between the two leaders of the U.S. and N. Korea ended with a verbal agreement to shut down N. Korea’s nuclear facilities, and I made a BIG Deal about how nothing was signed? That it was just a verbal agreement? Well, here we are some months after the summit, and guess what I read yesterday? That N. Korea was rebuilding their nuclear facilities… I’m not one to say, I told you so… but I did tell you so!

But this news failed to get Gold on a roll, as it should have, and the shiny metal was only able to eke out a 90-cent gain on the day. So, after over 215,000 contracts were traded, and the sawdust fell on the floor, Gold eked out 90-cents for the day…

The U.S. Data Cupboard will have a delayed report from January, in Factory Orders, the December Trade Deficit, and the ADP Employment Report, which lately, because of no fault of theirs, hasn’t been the indicator to the BLS jobs report that it’s supposed to be… I say no fault of the ADP folks, because The BLS has so many hedonic adjustments to the surveys they take that the BLS jobs report doesn’t look anything like what people expect…

I told you, dear readers, months ago that I was giving up on the BLS jobs report, and that I didn’t care about it any longer, it was dead to me… So, I’m glad I don’t get all involved in the BLS jobs report any longer, I smile more often now… HA!

To Recap… The ISM report surprised investors with a jump higher after months of losing ground, and that got the dollar bugs to come out of the wall boards in bunches, and the currencies got sold, VS dollars on the day. The BIS issued a ratings warning on Corporate Debt, that’s very scary to Chuck, but apparently not everyone else… And Gold was able to eke out a 90-cent gain on the day… Big Whoop, right?

For What It’s Worth… Another Brick in the Wall was added yesterday in the form of the U.S. Budget Deficit… and this report from Zerohedge.com has it for you today, and can be found here: https://www.zerohedge.com/news/2019-03-05/us-budget-deficit-soars-77-interest-expense-hits-record-high

Or, here’s your snippet: “Another month, another frightening jump in the U.S. budget deficit.

According to the latest Treasury data, the U.S. budget surplus in January – traditionally one of the few surplus months of the year due to tax receipts vs refunds timing – was only $9 billion, badly missing the $25 billion surplus expected, and far below the $49 billion surplus recorded last January; it was the smallest January gain since 2015.

As a result, the budget deficit for the first four months of the fiscal year, widened to $310 billion, a whopping 77% higher than the $175.7 billion reported for the same period last year, largely the result of the revenue hit from Trump’s tax cuts and the increase in government spending. The deficit was the result of a 2% drop in fiscal YTD receipts to $1.1 trillion, while spending jumped 9% to $1.4 trillion.

The jump in the deficit was despite the bump in customs duties, which almost doubled to about $24.5 billion this fiscal year from $12.6 billion a year ago, reflecting the Trump administration’s tariffs on Chinese imports.

What was more concerning perhaps is that rolling 12 month receipts declined 1.5% Y/Y, after posting a 0.4% drop last month which marked the first decline since March 2017. Worse, the absolute drop in tax receipts, which declined for both corporations and individuals, was the biggest since the financial crisis; and, every time that receipts have posted an annual decline, a recession either followed shortly or had already arrived.”

Chuck again… Let me emphasize something from that report here for you… So get a fresh cup of coffee, and you might want to add some Bailey’s to it to get through this… No? Ok, but put away the sharp objects, please… “Worse, the absolute drop in tax receipts, which declined for both corporations and individuals, was the biggest since the financial crisis; and, every time that receipts have posted an annual decline, a recession either followed shortly or had already arrived.”

Currencies today 3/6/19 American Style: A$.7030, kiwi .6775, C$ .7476, euro 1.1305, sterling 1.3143, Swiss $.9955, European Style: rand 14.1894, krone 8.6884, SEK 9.3310, forint 278.99, zloty 3.8030, koruna 22.6405, RUB 65.73, yen 111.87, sing 1.3575, HKD 7.8497, INR 70.20, China 6.7022, peso 19.26, BRL 3.7757, Dollar Index 96.91, Oil $56.00, 10-year 2.71%, Silver $15.11, Platinum $831.56, Palladium $1,513.64, and Gold… $1,285.64

That’s it for today… The sun just rose above the clouds on the ocean, and is shining brightly in my eye right now… Where are my shades? I love mornings here… While I was on vacation, we finished our construction project, and moved… It sure took much longer to complete than I thought it would… OK… I know I’m early, but… this will happen on the weekend, so… Happy Birthday to my good friend, Rick… I used to buy him a veggie pizza to split on his birthday and we would eat it in my old office… I sure hope you have a grand day, Rick! And with that, Donnie Iris takes us to the finish line with his song: Ah! Leah! I hope you continue to Be Good To Yourself!

Chuck Butler
Creator & Editor of:
A Pfennig For Your Thoughts