It's All Falling apart So Quickly I Can't Keep up!
David Haggith

All major banks rumbling, Fed tightening beyond all expectations, Magnificent-Seven stocks tumbling, fears of Volmageddon 2.0, junk bonds getting junkier, war blowing inflation upward.

Today’s news is so flooded with stories that show the trends I’ve teen warning about that I can’t even begin to cover them all in the time I have to read through the news, organize it and then write an editorial. So, I’m going to go through them in a rather staccato style to give the thrust of each story. Maybe I’ll have more time to come back to some of the detail in next weekend’s Deeper Dive.

Here goes:

Serious bank troubles are brewing in major banks

While Fitch today said that the sizes of the 49 small banks that are most heavily exposed to bad commercial real-estate (CRE) loans are small enough to limit their contagion, 49 is a lot, and another article today points out that the largest banks in American now have more more bad CRE debt in arrears than they have reserves, and that risk has grown rapidly. Here’s the gist of it:

At the largest US banks, bad commercial real estate loans have surpassed loss reserves, spurred by a significant uptick in late payments associated with offices, shopping centers, and other properties.

According to filings with the Federal Deposit Insurance Corporation, the average reserves at JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley have decreased from $1.60 to 90 cents for every dollar of commercial real estate debt where a borrower is at least 30 days overdue.

This sharp decline occurred over the past year, with delinquent commercial property debt for the six major banks nearly tripling to $9.3 billion.

Wow! That is a rapid build-up of actual trouble, not potential trouble. These are all loans that are already overdue, not just risky. Wish I had time to say more, but I’ve got so much to cover. Forget the worry over the 49 little banks in trouble. The top-six biggest banks don’t look too hot!

More say Fed UP

As we get to this point of reserves, held in the form of US Treasuries, are being crushed down in value due to Fed tightening to where bank reserves no longer cover the amount banks hold in just CRE loans that are not being paid on time (not to mention all the other loans in other industries on top of that!), yet another voice (actually two) came online today to agree with what was an outlandish proclamation when I made it on Goldseek Radio just a couple of weeks ago (and again in an interview with them this week, which I’ll post a link to when it’s ready.)

Bloomberg, of all publications to print something that agrees with my most outlandish suggestion (in the eyes of others but completely reasonable to me when I made it), says today that markets, not just individuals, are starting to speculate that the Fed’s next move might actually be … UP! Two weeks ago that was an eyebrow-raising claim when I made it. Now, we read the following in Bloomberg:

Markets start to speculate if the next Fed move is up, not down

Investors are beginning to war-game how the Federal Reserve can manage a US economy that just won’t land, with some even debating whether interest-rate hikeswill be needed only weeks after a steady run of reductions appeared all but certain.

“All but certain” to everyone but me (and I suppose some of those who read here, but I think many here would have thought I was nuts to say that, if the Fed makes any move, it will be up). As you know, I never bought into the Fed pivot fantasy even though, as far as I could tell, almost everyone believed that narrative.

Bets on lower rates coming soon were so prevalent a few weeks ago that Fed Chair Jerome Powell publicly cautioned that policymakers were unlikely to be in position to cut as of March. Less than three weeks later, traders have not only removed March as a possibility but May also looks improbable, and even conviction about the June Fed meeting is wavering, swaps trading shows.

What did I say when the majority of marketeers were moved from speculation on March cuts to May rate cuts to starting to speculate on June? I said, “Even June might be ambitious.” Here we are already, and some are starting to see the truth of what probably also sounded outrageous when I first put it out there a couple of weeks ago and again in the last few days. 

Bill Dudley also says the central bank may have to tighten more. In another story today one of the nation’s longtime central bankers admits that, yes, the Fed may have to tighten, not just longer but HIGHER. It depends on how much the rising stock market and bond values have loosened financial conditions.

There’s a lot more I’d like to say on that, but I need to move on…

Biggest, best stocks most imperil entire market

Bill Bonner and John Hussman point out a highly likely major market top. Bonner just came out with an article, quoting Hussman, in which Hussman’s charts parallel most of the main concerns I brought together in my last Deeper Dive about the market looking very close to an extremely perilous top. 

Based on dozens of measures that include valuations, internals, overextension syndromes, and numerous technical, fundamental, and cyclical gauges we’ve developed over time, we estimate that current market conditions now ‘cluster’ among the worst 0.1% instances in history – more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods.

The Big Loss threat today is in the stock market…and specifically, in the Magnificent 7 that dominate the top of the performance listings….

“I call this the ‘Cluster of Woe’ because the handful of similarly extreme instances (most notably in 1972, 1987, 1998, 2000, 2018, 2020, and 2022) were typically followed by abrupt market losses….

The Mag 7 is same area of concern I called attention to in my Deeper Dive before those stocks started wobbling, but moving right along because look at today’s news:

Magnificent seven start to crash? That’s how I tagged one of the story headlines because that is what the story suggests may now just be starting. Here’s the actual headline and a brief excerpt from the story:

Nvidia On Track For Historic Loss.…

Its morning sell-off amounted to a loss of more than $100 billion in market capitalization, according to Dow Jones Market Data. It would easily top the $56.24 billion loss suffered May 31, 2023.

Yes, HISTORIC loss of one of the top leading stocks in the group where just a weekend ago I was saying a serious down move in that group could bring the market indices down once some of the top-seven start to slide (because they are the only stock making the new highs and pushing the major indices up. “Historic!” So, that’s a serious down move!

Hardly expected by most because …

On Monday last week, shares rose to an all-time high Of 746.11.

Nvidia’s spiraling shares rallied later in the day to end a “mere” 5% down, but it was quite a dive, showing how quickly the Mag 7 could crash. And was it because Nvidia reported shocking problems? No! It didn’t even make its report yet. In fact everyone was anticipating a really good report as they sold off. It’s just that suddenly they doubted it would be as good as the lunatic market needed to hear in order to justify the insane stratosphere into which the market has priced Nvidea! They lost faith in a report that wasn’t even out yet! That is how wobbly belief is becoming in the market leaders. It was a case of a good reality not likely living up to an outrageous fantasy. It was more like the market looked down like ol’ Wile E. Coyote and suddenly saw nothing under their positions but desert air.

But on the to the next news …

Whispers of Volmageddon 2.0

Stock market gamblers betting on low volatility are nearly panicking that volatility might not stay so low. Back in 2018 a market heavily stacked on bets that volatility in stocks would stay low got plowed under when volatility spiked.

Some on Wall Street see risks akin to the 'Volmageddon' panic.

Sure the article notes that some investors don’t believe that will happen because they think stock investors have learned their lesson. Well, of course! There are always plenty of greedy investors at market tops willing to go longer on vapid stupidity! So, let’s look at the ones who are finally smartening up. Maybe they’ll make it out the exit in time, but they may not have long because the history behind this story is another example of how quickly a major market top can arrive and turn ugly—a lesson from 2018:

A popular trade that triggered a historic [There’s that word again.] market meltdown back in 2018 made a comeback last year, as one barometer of its performance logged its best year in six.

But as with any successful trade on Wall Street, some derivatives-market experts now fear that shorting volatility, or being "short vol," has become overcrowded, increasing the risk that a sudden spike in the Cboe Volatility Index VIX, or the VIX, could spark a selloff that might send the S&P 500 tumbling.

Market veterans likely remember the short-vol trade for triggering a market meltdown in early February 2018. The incident, known on Wall Street as "Volmageddon," saw the VIX more than double in a day, causing a short-lived but painful selloff in the broader stock market.

But this market is way more overpriced, so once something this top-heavy starts sliding down the slope, you may not be able to contain that avalanche.

Traders fret about a looming unwind.

They should.

Some traders see signs that such a dynamic might already be playing out….

To be sure, rising demand for insurance against a market crash could be a sign that investors are growing increasingly nervous that the top-heavy market could be about to topple over as Nvidia Corp….

I’d love to go deeper into the peculiar Nvidia rollover today; but, again, so much other powerful stuff to cover, so time to move on :

“Junk bonds are getting junkier!”

That’s the news, as stated, in another story today. Junk bonds are getting riskier as credit quality erodes. Always good news to hear that junk bonds are now at the point of getting crushed under Fed tightening at a time when the Fed is now being pressed to tighten longer and maybe higher by inflation that …. well, we’ll come to inflation’s prospects in a minute. First, the junk bonds:

The $1.4 trillion US junk-bond market is getting junkier, as more debt gets … downgraded … leaving greater potential risks for investors….

Pandemic-fueled “seismic changes” that altered the mix of the high-yield market are now reversing, according to Barclays Plc strategists.

I always love to hear the term “seismic changes” when talking about downgrades in major credit markets. When formerly positive “seismic changes” reverse, that can certainly move a mountain of debt into collapse. In other words, what was a seismic move one way easily has the mass to be a seismic move the other way when it turns over.

“Index quality is beginning to deteriorate,” the Barclays strategists wrote. “This shouldn’t change the outlook for default amounts in notional terms, but it does make the case that default rates could be higher.”

Good to know. Moving on in today’s news …

War, wars, and more wars are blowing inflation sky high

Remember me forecasting that the Red Sea War (time to name it now that the admiral of the US Navy just stated it is the largest active US naval engagement since WWII!) would likely grow scale and extend in duration to the point where it would bring back the kinds of shortages and port congestion we saw during the Covid lockdowns as well as the price pressure that come with shortages? I explained why that congestion would likely occur. (Nothing like rarity to raise the price of something!) Well, we’re already there according to another article today:

Container Lines Grappling with Port Congestion and Ship Shortages

Container shipping lines are encountering significant challenges as port congestion and ship shortages persist amidst the ongoing crisis in the Red Sea, which has extended into its third month. Jeremy Nixon, the chief executive of Ocean Network Express (ONE) in Japan, a key figure in the sector, highlighted the predicament faced by many shipping lines due to scheduling issues stemming from the Red Sea crisis.

The article lays out the details, but for my rapid rundown today, suffice it to say the port backups and shortages I anticipated are solidly here! So is the producer inflation that causes consumer inflation. Transportation rates are now the highest they’ve been in the three months this war has been raging, according to another story today. Prices for shipping crude have tripled from where they were in December.

One of the economists I often like to quote points out how inflation ain’t over till the fat lady sings, and he says she certainly hasn’t sung yet, what with this new tune floating over the Red Sea and one of the key indicators he looks at to see when inflation is going down for good. Inflation, he says, put in a sharp decline in 2023, but that is turning around just like all those tankers and cargo ships that turned from their customary Red Sea route to navigate far around the Cape of Good Hope.

Crude oil prices and gasoline have been rising recently; WTI is back to nearly $80. And durable goods prices cannot drop forever either, though they can drop for a while longer, given how high they’d spiked. If energy and durable goods prices just stall, overall inflation will accelerate faster because those two big categories are then no longer a counterweight to services. If energy prices and durable goods prices begin to rise again, then all bets are off…. So now we’re contemplating a scenario where inflation is accelerating again.

Well, guess what? Energy prices are rising again due to the Red Sea War, which I had warned would likely happen and would drive inflation up more quickly (being the main thing that brought it down quickly when prices went the other way), and that battle rages on because, as another story says, …

The Houthis are stepping up their attacks … now particularly focusing on American war ships.

Well, out of time, so much so that this edition had to come out late, but there it is now (all in a day’s news) finally put to bed, which is where I’m heading now.

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