Who Gets the Credit?
David Haggith

Mega Corps flow with liquidity in a landscape of credit euphoria while small businesses can scarcely find enough of a trickle to survive.

For companies issuing major high-risk bonds, the business landscape looks like the Fed rate hikes never happened. Although the Fed has hiked interest to 80’s inflation-killing levels faster than it has ever raised interest and has held rates there for more than half a year (which should leave institutions parched), even risky credit is finding all the buyers it could want and more.

One might think another bank recently hitting 2023-style runs would dry up high-risk credit, but no problem. Credit markets lowered rates in response to NYCB’s deep troubles. Meanwhile, stocks, Bitcoin and gold all hit record heights together this week. High-risk and safe havens: Everything got major cash inflows … except the one thing that was working best of all—high tech. Tech stocks saw their worst weekly outflow … EVER! What a bizarre market!

Perhaps that odd scenario, though, is part of the answer to why credit is easy for the big guys. Major money fleeing tech stocks has to go somewhere — so gold, bitcoin and big corporate bonds. One article today says, “risk-taking ebullience has taken hold.” Sort of, but huge outflows out of big tech don’t speak of risk taking. Current credit spreads on corporate bonds do, though.

Investors dumped technology stocks at the fastest rate on record and continued to pour money into investment grade bonds and cash equivalents in the week to Wednesday, Bank of America said on Friday….

While another article says,

The lowest-rated traded company debt is outgunning safer assets: Spreads between junk bond yields and investment-grade counterparts are tight. Loan prices are high as demand soars. Negative-yielding bonds are back. And whether Fed Chair Jay Powell wants it or not, it’s getting easier for companies of all stripes to snag funding.

So, maybe the high-risk money that is suddenly flowing out of tech stocks, as I discussed in an editorial earlier this week, is still greedy for the biggest gains it can get, but sees speculative gains forming in gold and bonds and Bitcoin all at the same time. Follow the money: that seems to be the direction the big flows are moving.

Incidentally, CFOs are back to using the company credit to pay for stock dividends and stock buybacks, too:

Issuers with ratings deep into junk territory are returning to the market and meeting strong demand.

Follow the money

With tech stocks having seen $4.4-billion in outflows in the past week (the largest outflow ever and first in nine weeks), $32-billion has flowed into cash and another $13.3 billion into investment grade bonds, which is the largest inflow in three-and-a-half years. The cash going into money-market funds has been due to the government bonds they hold now offering real money. Some say it is the good money in safe havens that is also spurring confidence in taking riskier bond bets. Gotta put that interest earned by clipping easy-money bond coupons to work somewhere, I guess.

For investors, this stampede into riskier assets is explained by a more benign view of the economy and the mountain of dollars they have ready to put to work. 

They made a lot of money speculating in the Magnificent Seven and are now booking profits and looking for a place to put it all.

“People thought the economic threat was going to be central banks causing a recession,” said Robert Tipp, chief investment strategist for PGIM Fixed Income. “They’re now seeing the economy can get by with this level of rates. There’s a lot of long-term money looking to get invested.”

The euphoria, however, is not without some concern among some analysts:

At the same time, there’s disquiet about whether the euphoria is getting out of hand. “There’s a version of the world where rates go up,” said Hunter Hayes, a portfolio manager at Intrepid Capital Management. “Things right now are priced for perfection. Something has to give. It’s sort of insane where high-yield spreads are….”

Yes, there is a version I’ve been mentioning where rising inflation actually could force the Fed to raise rates another notch. That is not in the current pricing or popular thinking at all. So, that poses a danger if markets are blind to what inflation might do.

The big flow of those gushing profits made by investing in tech stocks is pooling on some rather dank ground: 

M&A funding’s back on tap for both high-grade and junk-rated companies, as the moribund deal market shows signs of life. Bank of America Corp. has described the market for blue-chip corporate bonds as bubbly, while Barclays Plc’s index meant to track creditor fear is at levels associated with complacency. 

So, speculative euphoria and high-rolling bets on dimwit zombie corporations are all the rage now … it sounds like … and we are back to piling up debt like there is no tomorrow. Might as well do one last huge pile-on in the credit market before it all blows, just as we did in stocks. 

By such moves, risk is being mispriced.

US investment-grade spreads versus risk-free yields are close to historical tights and are pricing in all the good news from here.

Meaning high-risk bond financing is cheap.

Sam Wareham, a director in Deutsche Bank AG’s investment-grade syndicated debt business, said rampant demand means prices aren’t necessarily even reflecting what the Fed may or may not do.

Which means there is plenty of room for ugly surprises, especially if inflation rises a little more, as I just suggested, and forces the Fed to actually raise interest rates a notch. That could become quite a mudslide.

At the same time,

The quality of the US junk bond market is eroding and default rates remain high.

It’s my opinion that you can almost count on euphoria of any kind not ending well. But, for now, here we are … back at it once again.

In a parched land

However, all of that is no help to small businesses because they don’t seek their credit in such high-volume funding pools. They’re left standing in the middle of a funding desert right now—just like the middle class that doesn’t have the free capital to play games in bond pits or stock speculating.

Small business owners in the U.S. are struggling to get financing from traditional lenders as the impact of higher rates and bank failures of a year ago linger, holding back business growth for some.

So, for those guys, the bank failures last year and the latest one in process this year do matter! A number of graphs in one of the articles I presented among yesterday’s headlines highlighted how traditional funding sources (such as banks) have dried up funding for small, regional businesses—to a trickle so thin it is almost nothing.

Sharp interest rate hikes by the U.S. Federal Reserve, exacerbated by the failures of Silicon Valley Bank and Signature Bank last March are reverberating in the economy, say analysts and other industry insiders.

The little guy must feel like the Fed just loves to hurt him. Yet, small as these businesses are compared to the corporate giants, their totality is critical to the US economy:

Small businesses are key to the country’s economic health, with one study showing they account for 44% of US economic activity….

About 77% of small business owners are concerned about their ability to access capital and 28% of loan applicants said they had taken out a loan or line of credit with payment terms they felt were predatory, according to a survey by Goldman Sachs released in January which included nearly 1,500 small borrowers across the country.

"When banks tighten their underwriting criteria, it usually impacts low to moderate income communities more and they have been seeing a significant uptick in outreach from predatory lenders," said Carolina Martinez, CEO of CAMEO, California’s statewide micro-business network.

So, once again, the little guy and the middle class get shafted while mega-corp USA is flowing with streams of liquidity looking for the lowest of low spots to pool in order to get the highest yields that are currently available, yet the flow is so great those highest yields in the lowest of corporate junk are barely higher than “no-risk” Treasuries.

As for the little guy, The American Bankers Association assures everyone, however, that banks are still working hard “to meet the credit needs of this critical sector of the U.S. economy.” So, never mind those growing pains or the cracked clay around you if you’re one of the little guys: help is ready to trickle down at any moment.

Shantell Chambliss, a business owner based in Richmond, Virginia, said she has been hunting for a $25,000 loan since May and has been turned down by several lenders, forcing her to scale back her ambitions.

Her problem, you see, is that she isn’t thinking big enough. She needs to go for a billion-dollar loan and make sure her company is practically a bankrupt zombie; then she’ll find the big money. 

A little housekeeping

A month ago I said I was certain that the huge job report for January would get hugely revised down and that the downward revision would make it much easier for February’s report to shine (or, at least, not look so bad) because that is simply how government economic reports under Bidenomics have been working for over a year.

Today, we have this:

As Non-Farm Payroll hit the tape, the report initially looked strong, adding 275,000 jobs!

But that is where the “goodness” ends.

Downward revisions for the past 2 months were 167k! Making some (like me) wonder why we bother? Remember when last month seemed too strong? It was! Instead of 353k, we only got 229k (and why would we believe that next month, it won’t be revised down further?)….

The Household Survey showed job losses of 184k (bringing the 2-month total to over 200,000 jobs lost). Once again, on a brief glance, it looks like there were part-time jobs created, making the already weak report, even weaker.

It has all become so easily predictable now, but somehow the mainstream financial media never sees it at all and reports glowingly about January and then positively about February, too. (And then February will be revised down next month when no one is looking … as usual.) I plan to go into more depth about the absurd labor market in this weekend’s Deeper Dive for paid subscribers.

In the meantime, if you own a small business in Amerika, liquidity is so absent that even the cacti are dying: (Perhaps Biden should take the credit for that.)

Hawaiian desert cactus during extreme drought on the Big Island | © David Haggith

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