The sell-off in gold, a clear "sucker punch" moment - chart source Bloomberg:
But as indicated by David Goldman, the former global head of fixed income research for Bank of America, in a previous article about Gold and Treasuries and bonds in general he wrote in August 2011:
In similar fashion the burst of the credit bubble had a dramatic impact on housing, shipping was as well not spared as cheap credit did indeed fuel a bubble of epic proportion - source Bloomberg:
"The Baltic Dry Index aggregates the costs of moving freight via 23 seaborne shipping routes. It covers the movement of dry-bulk commodities, such as iron ore, coal, grain, bauxite and alumina. During 1Q, the index typically increases from its seasonally weak period. In 2013, it has been no exception, as the index declined 30.2% sequentially in 1Q. The gain was driven by the tightening panamax market." - source Bloomberg
The Baltic Dry has yet to recover.
China's slowdown is the reason behind the difficulties encountered by shipbuilders such as STX Group as indicated by Kuynghee Park on the 4th of April in his Bloomberg article - China Turns Graveyard From Goldmine Hurting Ship Makers:
From the same Bloomberg article:
"Since the credit crisis, orders to build new ships have plunged. Contracts for new vessels halved to $84.7 billion last year, compared with $174.7 billion in 2008, according to Clarkson Plc, the world’s biggest shipbroker." - source Bloomberg
For financial institutions such as Germany's second largest bank Commerzbank and impaired German bank HSH Nordbank, a large part of their recovery is linked to the fate of new ship deliveries given their shipping loan books have been seriously damaged by over-supply in the container ship markets as reported by Michelle Wiese Bockmann in Bloomberg on the 1st of March in her article - German Banks With Record Soured Ship Loans Forgo Seizing Vessels:
HSH Nordbank has shipping loans of 29 billion euros covering about 2,800 vessels, but looking at weak trading conditions, as indicated in a recent note by JP Morgan on HSH Nordbank published on the 4th of April, some ship owners are pushing for new ship deliveries originally scheduled in 2013 to be delivered later in 2014, with additional deferrals expected:
But looking at the deflationary depressed level of Dry-Bulk Shipping rates which are down 9% YoY, but up 78% from 2012 lows - source Bloomberg:
In that context of depressed rates, it is currently driving ship owners to scrap vessels at a strong pace as indicated by Bloomberg:
Whereas German HSH Nordbank's survival is depending on renewed global economic activity and its fate is tied up to shipping and so is the fate of its subordinated bondholders who, at some point could indeed face the same "restructuring" music as Dutch SNS bondholders as indicated in JP Morgan's note:
"We remain negative on the T1 instruments, as we believe that the next catalyst for these bonds would provide negative pricing pressure due to our expectation that there will need to be a retroactive charge for the increased risk shield at HSH which will impact the cash flow expectations of the T1 instruments. We acknowledge the bonds are pricing in a significant number of deferrals already, however, we do not see a positive catalyst in the near term. For both the LT2 and T1 instruments we will be keeping a keen eye on the deliveries of ships and any delays into future years as this could potentially prolong the turn in the shipping cycle out into 2015. If this were to happen we would become much more concerned for the outlook of HSH and its debt securities." - source JP Morgan
Another economic activity and deflationary indicator we have been tracking has been Air Cargo. It is according to Nomura a leading indicator of chemical volume growth and economic activity:
"Over the past 13 years’ monthly data, there has been an 84% correlation between air cargo volume growth and global industrial production (IP) growth, with an air cargo lead of one to two months. In turn,
this has translated into a clear relationship between air cargo and chemical industry volume growth" - source Nomura:
This Night of The Yield Hunter is as well marking the return of the famous retail Uridashi funds also known as Double-Deckers which we discussed in February in our conversation "The surge in the Brazilian real versus the US dollar marks the return of the "Double-Decker" funds."
The Brazilian Real is one of the top "Double-Deckers" preferred currency play for its interesting carry:
"As we indicated in October 2011, in our conversation "Misery loves company", the reason behind the large depreciation of the Brazilian Real that specific year was because of the great unwind of the Japanese "Double-Decker" funds. These funds bundle high-return assets with high-yielding currencies. "Double Deckers" were insignificant at the end of 2008, but the Japanese being veterans of ultralow interest, have recently piled in again."
And as indicated by Boris Korby and Julia Leite on the 11th of April in their Bloomberg article - "Kuroda’s $75 Billion Lets Gerdau Win Lowest Yield", Brazilian corporate credit is benefiting from this Yield Hunt from yet another self-appointed preacher namely Kuroda:
In that global hunt for yield which has been further stigmatised by Kuroda's monetary policies, even the lowest rated Brazilian issuers are taking advantage of the on-going hunt as indicated in the same article:
"Brazil’s lowest-rated investment-grade issuers are taking advantage of the absence of Brazil’s largest and most creditworthy borrowers from the market to raise funding and reduce borrowing costs, according to Henrique Catarino, the head of international sales at Banco Votorantim SA in Sao Paulo.
Lenders Itau Unibanco Holding SA and Banco Bradesco SA as well as state-run oil company Petroleo Brasileiro SA and iron-ore producer Vale SA, which sold a combined $13 billion abroad in the first quarter of 2012, have refrained from issuing bonds this year, flush with cash and willing to delay issuance until borrowing costs retreat further, according to Catarino. All four companies are rated at least Baa2 by Moody’s and BBB by S&P, on par with Brazil’s government." - source Bloomberg
We made the following point in "Structural Instability":
"The great Hyman Minsky thesis was "stability leads to instability", we would argue that dwindling liquidity and excessive spread tightening in core quality credit spreads courtesy of zero interest rates policy in both the US and Europe is extremely concerning and are already indicative of a great build up in structural instability."
We also added our previous "Hooke's law" ending remarks:
When reading the following article from Lisa Abramowicz entitled "Hardest-to-Sell Junk Lures Buyers Hooked on Fed", no doubt the self-appointed preachers of this world, namely central bankers have set this credit mousetrap:
"Investors are favoring the riskiest, hardest-to-trade junk bonds by the most in 17 months as confidence mounts that central banks from Japan to the U.S. will prop up debt markets through year-end.
The extra yield investors demand to buy the least-traded bonds with the lowest speculative-grade ratings instead of more liquid securities narrowed to 1.2 percentage points on April 9, the smallest gap since November 2011, according to Barclays Plc data. Yields on the smallest and oldest CCC rated notes contracted by 1.9 percentage points this year, three times the drop on yields for more active notes with comparable grades. Bond buyers seeking to escape the financial repression brought on by near zero interest rates are venturing deeper into the market in search of returns. They are bidding up the debt of companies that would otherwise be the most vulnerable to bankruptcy had the Federal Reserve not injected more than $2.3 trillion into the financial system since 2008." - source Bloomberg
We believe Europe face the risk of a disinflationary aka deflation bust.
A great definition of a disinflationary bust was made by the Gavekal team:
They published last year on that subject an interesting investment clock:
UBS indicated at the time they were following the HY ETF HYG as a stress indicator:
"We follow the HYG US high yield bond ETF to signal the state of US credit conditions."
In the US, High Yield credit has remained in line with equities since the beginning of the year. The de-correlation between credit and equities is nearly exclusively coming from Investment Grade credit and we indicated the relationship between High Yield and Consumer Staples in our conversation "Equities, playing defense - Consumer staples, an embedded free "partial crash" put option" how defensive the rally in the S&P500 has been so far - source Bloomberg:
The risk of a deflationary bust, validates our negative stance towards commodities and emerging markets as indicated last week for the second quarter. Here comes that "HATE", that old left hand.
On a final note, the 30 year-year interest-rate swap spread is approaching zero again linked to the fact that Dodd-Frank is forcing swaps to become cleared which will be supportive for US Treasuries as indicated by Bloomberg: