#2431
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As verticaldoug pointed out, this recovery may well be U-shaped. There are several factors that point to this: Rapidly aging US population as 10K boomers turn 65 daily. With the plunge in the equities and possible unemployment, more folks will be retiring just at the wrong moment. Depending on the study, the estimates range from 20-40% of retirees are dependent on Social Security as their main means of income (90%) in retirement. Pension underfunding complicates the issue. Many public and private pensions are underfunded by substantial amounts. And those estimates are based on a discount rate from 5% (private pension) to 7.5% (public); with interest rates near zero, those liabiilities increase 2x. And many public pensions have up to 30-40% of their assets in Alternatives (hedge funds, private equity) as they try to reach for yield/return and makeup for underfunding. If pension benefits are reduced to make the plans reasonably solvent, that will greatly impact retiree income. Note, many public pensioners are not eligible for Social Security and Medicare, as many elect not to pay those taxes (since they thought it would be redundant to have retiree pension and medical benefits already). Other headwinds:
As part of our risk management, my firm already had stress scenarios for pandemics and ultra-low interest rates, which affect both our assets and liabilities. If the credit cycle hits, the severity will be between a typical recession (1-in10 year event like dot.com and Financial Crisis) and the Great Depression. The amplifier is the record level of debt globally at the government, corporate and consumer level. Equities fell 57% from their peak in the Financial Crisis and were negative for 3 consecutive years after the dot.com bust. So, I think there is more downside if the credit cycle starts.
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My Bikes Last edited by veloduffer; 03-29-2020 at 10:12 AM. |
#2432
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Veloduffer
^^^^^ Very fine analysis. |
#2433
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Veloduffer hit the nail on the head. As a country, we now owe so much that it's going to be impossible to pay off the national debt. The best that we can hope for is that the entire world decides to forgive debts and start over.
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#2434
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good thing we slashed taxes for billionaires and giant corporations. so much value created!
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#2435
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#2436
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If you think this, then Trump is right we should just go back to work tomorrow. The calamity of a such an event is not recoverable. I have seen small versions in Greece and Argentine over the years, it brings much suffering to ordinary people. With all the guns in the United States, you are looking at Mad Max World.
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#2437
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Would you kindly define the expression "credit cycle" so more of us can understand what you've written?
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#2438
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You’re right, I should have specified speculative grade. S&P thinks it will be similar to 2008-09. I think it might be worse- there are more service-asset lite firms than those in a supply chain. With the cov-lite loan growth, defaults may be lower but recoveries will probably be much worse (historically loans have about 70% recovery). The rating agencies previously thought recoveries could decline to 50% but they were already in the 60s recently before the pandemic. Another issue that may affect recoveries is the capacity of the legal system to handle a wave of defaults- the process could be dragged out longer than usual and diminish value over time. The rating agencies are starting to actively downgrade. CCCs are increasing and collateral deterioration is narrowing cushions in CLOs. If CLOs hit their triggers, it could impact liquidity for high yield bond and loans. A lot of BBB debt will fall into high yield, which will be tough for the market to digest - more liquidity/price pressure. Though investors with dry powder may get the sale of a lifetime, like when RMBS was deeply discounted right after the crisis. Sent from my iPhone using Tapatalk
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#2439
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Do people think that the expected news over the next couple of weeks (climbing death rates) is already priced into the market?
Sorry to be ghoulish... I'm thinking that as the numbers climb, more investors will panic and go to cash... Thinking that this might be a good time to trim the (retirement) holdings. 10+ year horizon. No real damage so far, and a larger cash position might be useful 3-4 months out...
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Colnagi Seven Moots Sampson HotTubes LtSpeed SpeshFat Last edited by C40_guy; 03-30-2020 at 10:49 AM. |
#2440
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Today Tomorrow are just quarter end rebalancing and allocations. |
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Colnagi Seven Moots Sampson HotTubes LtSpeed SpeshFat |
#2442
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We are starting to see the beginning, as rating downgrades are accelerating - Ford, Occidental Petroleum, Cenovus, Macy's, Kraft-Heinz. 'Fallen angels' are investment grade companies that get downgraded to junk debt; YTD volume is about $135 billion, the 4th largest annual total in the market's history and we only finished the first quarter! There's about $900 billion of debt that is rated BBB- by at least one of the rating agencies (lowest investment grade rating by Moody's, S&P or Fitch). Guggenheim Partners thinks fallen angels could reach about $1 trillion this year. The problem for the market with a lot of fallen angels is that the investor base (potential buyers) is much more limited than the investment grade market. Many institutional firms, like pension funds, can't buy/hold junk debt and so when a fallen angel occurs, there's a lot of forced selling that further depresses the price of the bond. The last recession popped the housing bubble. This one may pop the debt bubble. Corporate debt (excluding banks and other financials) is 46% of GDP, about $10 trillion, and 2x higher than 2008. At the same time, the leveraged loan market (speculative) increased some 5x to $1.5 trillion (the junk bond market is about the same size). With the fallout of earnings and cashflow, leverage has increased and the cost of capital is much higher. The price of all risk assets (bonds, loans and equities) dropped like a falling knife. The Fed stepped in quickly and brought back all the alphabet programs (TALF, etc) to avoid a start to Depression.
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#2443
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Back to Q2 unemployment forecasts
The best I see now is Goldman with 15%. The St. Louis Fed has a really back of the envelop scenario: Estimated Layoffs in Q2 = 47.05mm people Unemployed Persons in Q2 = 52.81 mm Unemployment rate = 32.1% You can find in on stlouisfed.org on-the-economy blog |
#2444
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djia down a thousand a not even a bump?
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#2445
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nah, the trick is worn out- they are going to have to try something new if they want our attention.
On topic, bought some more CCL today during the tail end of that slaughter. Christ. |
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economy, freemoneyhouse, game stop, i like this stock, stonks, wealth |
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