Are Credit Markets Warning of a Lehman-Style Crisis? Mike Larson | Tuesday, February 9, 2016 at 4:20 pm
Credit. Credit. Credit.
That’s where the action is these days (and really, where it has been for the last year). And I’m here to tell you the credit markets look to be pointing toward an increasing chance of a Lehman-style crisis.
Hyperbole? Hardly! Take a look at this chart, which shows the cost of insuring against a default on some of the bonds issued by Deutsche Bank (DB) … The cost of insuring Deutsche Bank debt.
You can see the cost of credit-default-swap protection is exploding. So-called “CDS” contracts act like insurance against bond defaults, and the cost of that insurance surges when investors grow increasingly worried about the ability of a government or corporation to make good on its financial obligations. These are the kinds of moves we’ve only seen twice in the last decade — during the 2007-09 credit crisis and the PIIGS (Portugal, Ireland, Italy, Greece, Spain) debt crisis in 2011-12.
And it sure as heck isn’t just Deutsche Bank. CDS costs are jumping across the board here in the U.S., over in Asia and elsewhere in Europe. It’s just a question of degree. Investment-grade credit spreads are now also widening notably, following in the footsteps of the junk-bond market. Spreads there began blowing out several months ago.
Japanese stocks also plunged more than 5% overnight, the worst decline since June 2013. So many investors are dog-piling into government bonds for safety that more than $7 trillion in sovereign securities are now trading at negative yields. Plus, my personal “Look Out Below” indicator that I wrote about Friday is flashing bright red.
Last but not least: Things are getting so bad that Deutsche Bank had to issue a statement late yesterday saying it can make certain debt payments in the coming two years. That was followed up by a memo to employees today in which co-CEO John Cryan claimed the bank was “rock-solid.” The mere fact the company felt compelled to say things are just peachy tells you they could be anything but. Are we headed there again?
Me? I am so glad that you’re a reader of Money and Markets (and hopefully a reader of my Safe Money Report, too). I say that because you received early warnings about all of these problems 2,000 Dow points ago, and were given step-by-step guidance on what to do to prepare your portfolio for the carnage we’re seeing now.
But what if you didn’t act yet? And more importantly, what do I see happening next? I’ll be the first to admit markets are oversold in the short term. We could easily see a bounce at any time, particularly if Federal Reserve Chairman Janet Yellen throws the bulls a bone in her Congressional testimony tomorrow.
At the same time, it’s abundantly clear to me that central bankers have lost whatever control of the markets they once had. Investors are taking matters into their own hands because they can see the global economy slumping – and they know the bankers are rapidly running out of bullets. “Widespread adoption of negative interest rates is making things worse.”
If anything, the increasingly widespread adoption of negative interest rates is making things worse not better. I say that because bank stocks plunged further in Europe and Japan, and credit-market stress rose further, AFTER central banks there cut rates into negative territory.
So I’m advising you … urgently … to follow the bear market playbook I partially shared in September. It’s not too late to protect yourself, nor is it too late to target profits from downside moves in vulnerable stocks.
Do you agree? Are we still early in this bear market process, or are stocks about to reverse course and surge higher? What do you think about the problems at Deutsche Bank and other large financial firms? Is this Lehman Brothers all over again, or are markets panicking unnecessarily? Hit up the comment section and let me and your fellow investors know what you’re thinking.
Poster Comment:
Got to watch the CDS. Look out below.