Credit Markets in Distress, North American Defaults Rising, Confidence Intact… for Now

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  • Post category:Economy

It is no secret that US credit markets have been increasingly stressed lately.  Junk bonds are tanking and junk’s ratios to the relative quality of Investment Grade and Treasury have as well.

hyg, lqd, tlt weekly chart

The percentage of North American companies losing money is steadily climbing and that should be an indication of a coming increase in corporate defaults.  From Credit Suisse, by way of the Daily Shot

north american defaults

This almost looks too logical, considering that Europe is in bailout mode seeing its unprofitable businesses decline and the US is in tightening mode with US businesses going the other way.

The Fed wouldn’t have some sort of QE (concurrent with, or soon to follow the initiation of a rate hike cycle) in its back pocket, would it?  They are in a tightening stance (i.e. a Kabuki Dance) even though credit markets and the US dollar have already tightened.  But the Fed is backed into this corner because policy normalization is expected of them.

But this cycle is not normal and has not been normal for one damn minute since 2008 because it was created out of thin air by policy that was grounded only in interest rate and bond market manipulation.  I have believed since the beginning that the cycle’s main job has been to completely erase the blow off in negativity from 2008/2009 from the average person’s consciousness.

Mission accomplished, but if credit markets continue to stress and economic signals continue to transition to negative, the Fed is going to be in a box.  And a Fed in the box is a Fed losing its grip of ironclad confidence on the people.  If the day comes that they panic in an inflationary manner, the Fed will again be seen for what it is.

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