Deutsche Bank Says World "Past The Point Of No Return" In The Default Cycle

Submitted by Tyler Durden on 04/11/2016 07:57 -0400
http://www.zerohedge.com/news/2016-04-11/deutsche-bank-says-world-past-point-no-return-default-cycle
Over the past year, the credit cycle finally turned, and has unleashed the latest default cycle. In fact, as BofA's Michael Contopoulos warned last week, it may be the worst default cycle in history with "cumulative losses over the length of the entire cycle could be worse than we’ve ever seen before."
Over the weekend, the FT got the memo with a report that "global company bond defaults at highest level since 2009" in which it said that "the global bond default rate by companies is running at its highest since 2009 with the US accounting for the vast majority, according to rating agency Standard & Poor’s. A further four defaults this week, with three coming from the troubled oil and gas sector, pushed the overall tally to 40 with a little over a quarter of 2016 done."
To be sure, the US default cycle is bad and getting worse. But how much worse?
The latest to attempt that answer is DB's Jim Reid who in his just released 18th annual default study explains why his "late cycle fears continue to build." These are some of the highlights:

There are clear signs the cycle is turning, especially in the US. Our US strategists have previously suggested that we need the combination of three conditions for us to be confident the next default cycle is imminent. We need the accumulation of excessive debt and preferably of deteriorating quality, some kind of external shock/trigger and tighter monetary policy/a flattening of the yield curve. The pieces of the jigsaw are building. US corporate debt accumulation now compares with that seen prior to previous default cycles. Equity volatility has seen two spikes in the last 12 months (August and early 2016), bank equity is falling (a lead indicator of lending?) and global yield curves continue to flatten.

* * *

The buildup of excess is often a pre-requisite for bubbles to burst or for economic cycles to be vulnerable to shocks. One argument for why this US economic cycle might still be able to run for a few years is that many economists feel that excess hasn’t been as prevalent as in prior cycles. However one can argue there has been a sizeable increase in US corporate debt since the GFC comparable to increases prior to previous default cycles. As Figure 15 shows, in the modern era of leveraged finance the debt cycle waves have been well correlated to defaults. We’ve used single-Bs to keep credit quality constant throughout and used Fed data to determine non-financial corporate debt/GDP.



Our US credit strategists measure the total growth of debt stock as well as its aggressiveness to determine whether there has been sufficient “material” created to feed the next wave of defaults. Figure 16 looks at the growth of the stock of US HY debt as well as the aggressiveness of new issuance. The former is measured by the combined size of the HY bond market (USD developed markets) and loans on U.S. bank balance sheets. The graph shows distinct periods of debt growth in the past, going back to the late 1980s, with each of the past three complete credit cycles preceded by waves of new debt creation, lasting from four to five and a half years, and resulting in cumulative debt stock growth of 53-68% (shaded areas). The current episode, measured since early 2011, has lasted 5.2 years and resulted in 64% growth in the combined value of the high yield bond market and loans on bank balance sheets, putting it comfortably inside the range of previous cycles. It shows a similar result to our own US corporate debt/GDP chart.



For a measure of aggressiveness in recent issuance trends, our US strategists look at CCC-rated issuance in HY and leveraged loans, as a percentage of total  market size, as shown in the right-hand graph of Figure 16. Volume is presented as a percentage of total market size (HY + loans), on a trailing-12- month basis. Shaded areas again highlight previous debt growth cycles, as well as the most recent one, with figures printed inside representing cumulative CCC issuance volume for the full duration of each episode, divided by the market size at its start. The previous two credit cycles, in the late 1990s and mid- to late 2000s, saw this indicator expand by 20% and 18%, respectively, compared to its present value of 17%. Unfortunately, there is a lack of detailed issuance data to extend this to the first cycle in the late 1980s.

The analysis is somewhat conservative in estimating the starting point of the current credit cycle to be January 2011. Arguably, the market was healing and perhaps even expanding in 2010, which would make these measurements of pre-requisite debt growth and aggressiveness look even more stretched here. We will nonetheless use the numbers shown above, as we aim to build our case for the timing of the next default cycle based on the more conservative assumptions.

We can therefore conclude that pre-requisites for the next default cycle are now in place.

From the conclusion:

The artificial ingredients keeping defaults below their 1983-2003 levels are still broadly in place so although we expect the next default cycle to be round the corner it could still be mild relative to the early 90s and early 00s cycle and even the already subdued 2009 cycle which was very short, especially given the economic wreckage seen.

As we’ve suggested in previous editions of this report, this is likely due to the increasing artificial demand for fixed income seen over the last 15-20 years which effectively allows more financing opportunities for levered companies at lower yields than they might be asked to pay if global fixed income markets were a perfectly free market where the only consideration was relative value. Over the last two decades, SWFs, pension funds, insurance companies, banks and more recently central banks in great size have distorted the demand for and yield of global fixed income. This is unlikely to change and although the Oil and Gas sector demonstrates that bad fundamentals can still win out, for more marginal companies, the artificial conditions in fixed income could still help prevent a more savage cycle.

Obviously the Oil and Gas sector will play a big part in determining the overall level of defaults and in a separate section our US strategists detail their expectations for defaults in this sector and how that will filter through into the wider US HY market.

It’s also true that credit spreads are relatively elevated and price in a default rate markedly higher than current levels. Indeed as we’ll see throughout the body of this report, at an aggregate level a buy-and-hold investor would need to see defaults worse than virtually all observed periods through history for them not to get a positive excess return relative to Government bonds from this starting point. However if we do see a recession even if defaults are relatively subdued the illiquidity of financial markets could easily see big mark-to- market losses. Recession tend to bring big overshoots in credit spreads relative to default risk anyway. So lower structural defaults may not provide comfort in the heat of the next recession but current spreads should give longer-term investors some comfort across the vast majority of sectors.

All of which perhaps explains why the ECB is well on its path to monetizing junk bonds once it is done with investment grade corporates.

Glencore Implodes: Stock Plunges Most Ever, CDS Blow Out To Record Up On Equity Wipeout Fears

Submitted by Tyler Durden on 09/28/2015 07:20 -0400
http://www.zerohedge.com/news/2015-09-28/glencore-implodes-stock-plunges-most-record-cds-blows-equity-wipeout-fears
Update: And there it is: GLENCORE DEBT INSURANCE COSTS SURGE TO RECORD HIGH; 5-YR CREDIT DEFAULT SWAPS RISE 207BASIS POINTS FROM FRIDAY'S CLOSE TO 757 BASIS POINTS

* * *
Just last Thursday we asked whether Goldman was "preparing to sacrifice the next Lehman", by which of course we meant the world's largest commodity trading counterparty, Baar, Switzerland-based Glencore which just two weeks ago unveiled an unprecedented "doomsday" capital raising and deleveraging plan which, in retrospect, was not enough.
The punchline of Goldman's report was that if commodity prices drop 5%, or even stay where they are, then Glencore's investment grade rating - the most critical foundation of its entire trading operation where a downgrade to junk would launch a collateral and margin-call waterfall cascade a la AIG - would be lost. From Goldman:

Glencore’s trading business relies heavily on short-term credit to finance commodity deals and its financing costs would increase if it were to lose its Investment Grade credit rating. In addition, it could even lose some counterparties due to increased counterparty risk.

As we added on Thursday, "what a junking of Glencore would do, is start a collateral demand waterfall cascade that the cash-strapped company simply would not be able to sustain." So having laid out the strawman, Goldman next, very conveniently, explains just what would take for the Investment Grade trap to slam shut: "it would only take a c.5% fall in spot commodities prices for concerns about its credit rating to resurface."
Of course, Glencore's leverage to commodity prices was first explained in our March 2014 post, in which we said buying Glencore CDS is the best and easiest way to bet on a Chinese credit and commodity crunch.
Fast forward to Monday morning when those who bought into Glencore's equity offering at 125p less than two weeks ago on September 16, are already down a whopping 43% (we won't even bother calculating the loss since the company's 2011 IPO), following the biggest daily drop in Glencore history, with the stock mauled some 27% at last check...

... on the heels of a note from Investec which said nothing Zero Hedge readers did not already know, but which is spooking everyone else into realizing that the commodity trading Titanic may well be sinking.
In the note Investec notes that "using a PE-based approach to evaluate equity value going forward, in proportion to debt, we note that the heavily indebted companies (GLEN, AAL) could see almost all equity value eliminated under spot conditions, leaving nothing for shareholders.... GLEN recent restructuring may prove just the start for the majors if spot prices prevail - this supports our concern that we are still a distance from the "value point" in the sector.
In other words, even if commodity prices remain unchanged, GLEN equity could be doughnut. If commodity prices continue dropping, then - well - just read out prediction from last year.
It also means that bondholders are next in line to hold the equity after a debt-for-equity, which has also pushed Glencore's bonds to record lows, with the GLEN €1.25b notes due March 2021 dropping three cents to 78 cents on euro, while the €750m bonds due March 2025 decline four cents to 67 cents. Both are at record lows.
If and when the bondholders realize a bankruptcy would leave them with negative enterprise value when netting out all the margin calls, we wouldn't be surprised to see bonds trading below 50 in the coming months if not weeks.
Meanwhile, those who listened to our reco to buy Glencore CDS at 170 bps in March 2014 can take the rest of the year off. As of this moment, GLEN Credit Default Swap were pushing on 600 bps, 4 times wider, and on pace to take out the 2011 liquidity crunch highs. After that, it's smooth sailing to all time wides and the start of a self-fulfilling prophecy which leads to the Companys's IG downgrade and the collapse of trillions in derivative notionals as what may be the trading desk of the biggest commodity counterparty quietly goes out of business.

Is Goldman Preparing To Sacrifice The Next "Lehman"

Submitted by Tyler Durden on 09/24/2015 23:54 -0400
http://www.zerohedge.com/news/2015-09-24/goldman-preparing-sacrifice-next-lehman
One of the more "unmentionable" conspiracy theories surrounding the demise of Lehman Brothers in 2008 is that this "shocking" event was in fact a well-choreographed and carefully scripted "controlled demolition", with the Lehman Bankruptcy - the event that officially unleashed the Great Financial Crisis - getting the express prior permission of both Ben Bernanke and Hank Paulson, a former Goldman employee, whose motive was the elimination of the one firm that was then Goldman's biggest competitor in the FICC space, and whose subsequent bailout of his former employer (Goldman Sachs and all other insolvent banks) would lead to the preservation of trillions in worthless equity courtesy of the biggest taxpayer funded bailout in history, and with billions in excess reserves parked on Goldman's balance sheet smoothing the bank's transition through a historic recession.
Fast forward to this week when as we reported previously, following a surge in its Credit Default Swaps, the "doomsday" scenario for Glencore is now on the table, because the market suddenly realized that Glencore's most valuable asset, not its mines, or its trading operations, but its investment grade rating, could be stripped away.
This is what we said, after we noted that GLEN CDS had just hit a multi-year wide of 464bps (precisely as we said it would over a year ago):

We expect this CDS blowout to continue.

What's worse, if the company is downgraded from investment grade to junk, watch as the "commodity Lehman" scenario for Glencore, which much more than a simple copper miner just happens to be one of the world's biggest commodity trading desks, comes full cricle leading to waterfall collateral liquidations and counterparty freeze-outs as suddenly the world is reminded that there is a vast difference between a real and a rehypothecated commodity, and that all collateral rehypothecation chains are only as strong as the weakest counterparty!

Long story short: if and when Glencore loses its Investment Grade rating, it's more or less game over, if not for the company's already mothballed mining operation then certainly for its trading group, where "junking" would lead to numerous collateral shortfalls and margin call waterfalls, reminiscent of the ratings agency downgrade of AIG that culminated with the US bailout of the insurer.
Therefore we were not surprised earlier today to see Glencore stock crash to a new record low below 100p even as the CDS blow out continued.


We were, however, very surprised by the catalyst, because the company that managed to successfully hammer Glencore, which in our view is nothing short of the commodity "Lehman" (or perhaps AIG) was none other than Goldman, which earlier today released a report which is essentially blueprint for not only how to take away Glencore's precious investment grade rating, but taken a few steps further, how to unleash this cycle's commodity "Lehman event" (once again, Glencore is first and foremost a trading desk which serves as a counterparty with trillions in derivatives notional exposure to virtually every other commodity using and trading entity in the world) and taken to the extreme, how to "force" the Fed to finally unleash the helicopter money should Glencore's failure be the catalyst the pushes the entire world into a deflationary recession, if not outright depression.
This is what Goldman said earlier in a note titled "Much progress made but the song remains the same"

We update our estimates for Glencore following the completion of its equity placement on September 16, in which it raised its target of $2.5bn. We also update our estimates to incorporate our commodity analysts’ lower thermal coal forecasts ($58/54/52/t for 2015/16/17E) and lower met coal forecasts ($91/85/90/t), which impacts Glencore’s 2016/17/18E EBITDA by c.15-18%... On lower estimates we reduce our 12-month price target to 130p (was 170p).

Implications

Since announcing c.$10bn of debt reduction measures on September 7 and completing a 9.9% equity placing, shares have retreated a further 14%. In our view investors are not yet convinced that Glencore has gone far enough to totally allay fears that the industrial assets can service the new lower debt level. Our scenario analysis suggests that using GS estimates for commodities prices and FX rates, Glencore’s IG rating would be secure in the medium term, but our estimates for zinc, nickel and coal prices are higher than spot prices. When we run the same analysis using spot commodity prices and spot FX rates, most of Glencore’s credit metrics would be at the border of required ranges to maintain its IG rating. Finally, a 5% drop in spot commodity and flat FX would see most of Glencore’s credit rating metrics fall well outside the required range to maintain its IG rating, suggesting concerns would quickly resurface. Glencore has a few levers left – further lowering capex, signing streaming deals and releasing more working capital. Recent underperformance suggests that the measures exercised are insufficient and more is needed. We remain Neutral rated but expect continued volatility in the near term.

Why is Glencore's IG rating so critical? As explained above, Glencore is really not so much the Lehman as the AIG of the commodity world: without an investment grade rating, a self-reinforcing collapse will begin that could ultimately terminate Glencore's trading desk, in the process liquidating one of the world's biggest commodity trading counterparties.
From Goldman:

Glencore’s trading business relies heavily on short-term credit to finance commodity deals and its financing costs would increase if it were to lose its Investment Grade credit rating. In addition, it could even lose some counterparties due to increased counterparty risk.

That's putting it mildly: what a junking of Glencore would do, is start a collateral demand waterfall cascade that the cash-strapped company simply would not be able to sustain.
So having laid out the strawman, Goldman next, very conveniently, explains just what would take for the Investment Grade trap to slam shut:

it would only take a c.5% fall in spot commodities prices for concerns about its credit rating to resurface

While Glencore’s announced measures have allayed near-term concerns about the potential for its credit rating to be downgraded, its high leverage to commodity prices is demonstrated in our scenario analysis, where we estimate just a c.5% drop in spot commodity prices would see concerns resurface about the potential for its credit rating to be downgraded. In addition, given the latest guidance on capex of c.$4bn in FY17, we believe there is limited flexibility for the company to make any further cuts while maintaining its production targets.

Wait, high leverage to commodity prices as the biggest risk factor? Where have we seen this before? Oh yes, in our March 2014 post (saying to buy GLEN CDS) which showed the one thing nobody was looking at at the time; Glencore's, wait for it, high leverage to commodity prices!


For those who enjoy playing with numbers, here is Goldman's real "Doomsday" scenario: the one which sees Glencore's IG rating stripped. As Goldman admits, all it would take is a small 5% drop in commodity prices from here:

If commodity prices were to fall 5% from current levels – which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China – we believe that concerns about its IG credit rating would quickly resurface. Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and as early as the next reporting period (FY15).

Although Glencore has a few levers left in the event commodity prices continue their leg down (such as deferring capex and executing streaming deals), the key point to highlight is that executing these options would take time. That said the recent announcement by Silver Wheaton that it is working with Glencore on the streaming deal highlights that management is focused on bolstering its balance sheet.

Charted:

It goes without saying that courtesy of HFTs and China's hard landing, a 5% drop in commodities could happen overnight.
So if one is so inclined, and puts on the conspiracy theory hat mentioned at the beginning of this post, Goldman may have just laid out the strawman for the next mega bailout which goes roughly as follows:

1. Commodity prices drop another 5%
2. The rating agencies get a tap on their shoulder and downgrade Glencore to Junk.
3. Waterfall cascade of margin and collateral calls promptly liquidates Glencore's trading desk and depletes the company's cash, leaving trillions of derivative contracts in limbo. Always remember: the strongest collateral chain is only as strong as its weakest conterparty. If a counterparty liquidates, net exposure becomes gross, and suddenly everyone starts wondering where all those "physical" commodities are.
4. Contagion spreads as self-reinforcing commodities collapse launches deflationary shock wave around the globe.
5. Fed and global central banks are called in to come up with a "more powerful" form of stimulus
6. The money paradrop scenario proposed by Citigroup yesterday, becomes reality

Too far-fetched? Perhaps. But keep an eye out for a Glencore downgrade from Investment Grade. If that happens, it may be a good time to quietly get out of Dodge for the time being. Just in case.

The $12 Trillion Fat Finger: How A "Glitch" Nearly Crashed The Global Financial System - A True Story

Submitted by Tyler Durden on 08/08/2015 17:43 -0400

http://www.zerohedge.com/news/2015-08-08/12-trillion-fat-finger-how-glitch-nearly-crashed-global-financials-system-true-story

 For all the talk of how the financial world nearly ended in the aftermath of first the Lehman bankruptcy, then the money market freeze, and culminating with the AIG bailout, and how bubble after Fed bubble has made the entire financial system as brittle as the weakest counterparty in the collateral chain of some $100 trillion in shadow liabilities, the truth is that despite all the "macroprudential" planning and preparations, all the world's credit, housing, stock, and illiquidity bubbles may be nothing when compared to the oldest "glitch" in the book: a simple cascading error which ends up taking down the entire system.

Like what happened in the great quant blow up August 2007.

For those who may not recall the specific details of how the "quant crash" nearly wiped out all algo and quant trading hedge funds and strats in a matter of hours if not minutes, leading to tens of billions in capital losses, here is a reminder, and a warning that the official goalseeked crisis narrative "after" the fact is merely there to hide the embarrassment of just how close to total collapse the global financial system is at any given moment.

The following is a true story (courtesy of b3ta) from the archives, going all the way back to 2007:

I.T. is a minefield for expensive mistakes

There's so many different ways to screw up. The best you can hope for in a support role is to be invisible. If anyone notices your support team at all, you can rest assured it's because someone has made a mistake. I've worked for three major investment banks, but at the first place I witnessed one of the most impressive mistakes I'm ever likely to see in my career. I was part of the sales and trading production support team, but thankfully it wasn't me who made this grave error of judgement...

(I'll delve into obnoxious levels of detail here to add color and context if you're interested. If not, just skip to the next chunk, you impatient git)

This bank had pioneered a process called straight-through processing (STP) which removes the normal manual processes of placement, checking, settling and clearing of trades. Trades done in the global marketplace typically have a 5-day clearing period to allow for all the paperwork and book-keeping to be done. This elaborate system allowed same-day settlement, something never previously possible. The bank had achieved this over a period of six years by developing a computer system with a degree of complexity that rivalled SkyNet. By 2006 it also probably had enough processing power to become self-aware, and the storage requirements were absolutely colossal. It consisted of hundreds of bleeding edge compute-farm blade servers, several £multi-million top-end database servers and the project had over 300 staff just to keep it running. To put that into perspective, the storage for this one system (one of about 500 major trading systems at the bank) represented over 80% of the total storage used within the company. The equivalent of 100 DVD's worth of raw data entered the databases each day as it handled over a million inter-bank trades, each ranging in value from a few hundred thousand dollars to multi-billion dollar equity deals. This thing was BIG.

You'd think such a critically important and expensive system would run on the finest, fault-tolerant hardware and software. Unfortunately, it had grown somewhat organically over the years, with bits being added here, there and everywhere. There were parts of this system that no-one understood any more, as the original, lazy developers had moved company, emigrated or *died* without documenting their work. I doubt they ever predicted the monster it would eventually become.

A colleague of mine one day decided to perform a change during the day without authorisation, which was foolish, but not uncommon. It was a trivial change to add yet more storage and he'd done it many times before so he was confident about it. The guy was only trying to be helpful to the besieged developers, who were constantly under pressure to keep the wretched thing moving as it got more bloated each day, like an electronic ‘Mr Creosote’.

As my friend applied his change that morning, he triggered a bug in a notoriously crap script responsible for bringing new data disks online. The script had been coded in-house as this saved the bank about £300 per year on licensing fees for the official ‘storage agents’ provided by the vendor. Money that, in hindsight, would perhaps have been better spent instead of pocketed. The homebrew code took one look at the new configuration and immediately spazzed out. This monged scrap of pisspoor geek-scribble had decided the best course of action was to bring down the production end of the system and bring online the disaster recovery (DR) end, which is normal behaviour when it detects a catastrophic 'failure'. It’s designed to bring up the working side of the setup as quickly as possible. Sadly, what with this system being fully-replicated at both sites (to [cough] ensure seamless recovery), the exact same bug was almost instantly triggered on the DR end, so in under a minute, the hateful script had taken offline the entire system in much the same manner as chucking a spanner into a running engine might stop a car. The databases, as always, were flushing their precious data onto many different disks as this happened, so massive, irreversible data corruption occurred. That was it, the biggest computer system in the bank, maybe even the world, was down.

And it wasn't coming back up again quickly.

(OK, detail over. Calm down)

At the time this failure occurred there was more than $12 TRILLION of trades at various stages of the settlement process in the system. This represented around 20% of ALL trades on the global stock market, as other banks had started to plug into this behemoth and use its capabilities themselves. If those trades were not settled within the agreed timeframe, the bank would be liable for penalties on each and every one, the resulting fines would eclipse the market capital of the company, and so it would go out of business. Just like that.

My team dropped everything it was doing and spent 4 solid, brutal hours recovering each component of the system in a desperate effort to coax the stubborn silicon back online. After a short time, the head of the European Central Bank (ECB) was on a crisis call with our company CEO, demanding status updates as to why so many trades were failing that day. Allegedly (as we were later told), the volume of financial goodies contained within this beast was so great that failure to clear the tradeswould have had a significant negative effect on the value of the Euro currency. This one fuckup almost started a global economic crisis on a scale similar to the recent (and ongoing) sub-prime credit crash. With two hours to spare before the ECB would be forced to go public by adjusting the Euro exchange rate to compensate, the system was up and running, but barely. We each manned a critical sub-component and diverted all resources into the clearing engines. The developers set the system to prioritise trades on value. Everything else on those servers was switched off to ensure every available CPU cycle and disk operation could be utilised. It saturated those machines with processing while we watched in silence, unable to influence the outcome at all.

Incredibly, the largest proportion of the high-value transactions had cleared by the close of business deadline, and disaster was averted by the most "wafer-thin" margin. Despite this, the outstanding lower-value trades still cost the bank more than $100m in fines. Amazingly, to this day only a handful of people actually understand the true source of those penalties on the end-of-year shareholder report.Reputation is king in the world of banking and all concerned --including me-- were instructed quite explicitly to keep schtum. Naturally, I *can’t* identify the bank in question, but if you’re still curious, gaz me and I’ll point you in the right direction…

Epilogue… The bank stumped up for proper scripts pretty quickly but the poor sap who started this ball of shit rolling was fired in a pompous ceremony of blame the next day, which was rather unfair as it was dodgy coding which had really caused the problem. The company rationale was that every blaze needs a spark to start it, and he was going to be the one they would scapegoat. That was one of the major reasons I chose to leave the company (but not before giving the global head of technology a dressing down at our Christmas party… that’s another QOTW altogether). Even today my errant mate is one of the only people who properly understands most of that preposterous computer system, so he had his job back within six months -- but at a higher rate than before :-)

Conclusion: most banks are insane and they never do anything to fix problems until *after* it costs them uber-money. Did I hear you mention length? 100 million dollar bills in fines laid end-to-end is about 9,500 miles long according to Google calculator.

* * *

And here is Zero Hedge's conclusion: the next time you think all those paper reps and warranties to claims on billions if not trillions of assets, are safe and sound in some massively redundant hard disk array, think again.

"There Are Big, Big Problems" - The Shocker Crushing The Economy Revealed

Submitted by Tyler Durden on 04/13/2015 23:35 -0400
http://www.zerohedge.com/news/2015-04-13/unseen-recession-shocker-crushing-economy-revealed-credit-rejections-soar-most-everWe are grateful to Alexander Giryavets at Dynamika Capital for pointing us to something which is far more troubling than even the Atlanta Fed's collapse in Q1 GDP tracking: namely the latest Credit Managers Index for the month of March which "deteriorated significantly over the last two months and current readings stand at the recessionary levels not seen since 2008."
To be sure, we have previously shown the collapse in consumer debt as reported by the Fed, which as we noted, just suffered its worst month for revolving credit since December 2010 and explains "why the consumer has literally gone into hibernation - it has nothing to do with the weather, and everything to do with the unwillingness to "charge" purchases, which in turn is a clear glimpse into how the US consumer sees their financial and economic future."


It turns out it may not have been just a matter of demand: apparently something very dramatic has been happening in February and especially in March. Instead of spoiling the punchline, we will leave it to the National Association of Credit Managers to explain what happened:
From the latest NACM Credit Managers Index:

We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather. There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward. These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage. The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.

You mean it wasn't the weather? "As was the case last month, the majority of the damage was seen in the service sector and this month it is going to be hard to blame it all on the weather or some other seasonal factor."
Ok, good to know that we were correct in mocking all those "economisseds" who say the recent collapse in seasonally-adjusted (as in adjusted for the seasons... such as winter) data was due to the, well, winter, a winter in which 3 of 4 months were hotter than average!
So what is going on? Well, nothing short of another recession it appears.

The combined score is getting dangerously closer to the contraction zone and has not been this weak in many years (going back to 2010). It is sitting at 51.2 and that is down from the 53.2 noted last month. For most of the last two years, these readings have been in the mid-50s and above—comfortable territory and generally trending up from one month to the next and now there is a very disturbing trend downward. The index of favorable factors slipped substantially, but remains in the mid-range at 55.4. That would be seen as better news if it were not for the fact that these readings had consistently been in the 60s during the last couple of years. It was only August of last year when the reading was a robust 63.8. The most drastic fall took place with the unfavorable factors that indicate the real distress in the credit market. It has tumbled from 50.5 to 48.5 and that is firmly in the contraction zone—a place this index has not been since the days right after the recession formally ended. The signal this sends is that many companies are not nearly as healthy as it has been assumed and that there is considerably less resilience in the business sector than assumed.

Of course, in a world in which the only economic growth comes as a result of new credit entering the economy (as opposed to Fed reserves being stuck in the S&P), the only thing that matters is how easy it is to get credit into the hands of those who need it. As it turns out it has never been more difficult to get credit.
No really!
According to the CMI, the Rejections of Credit Applications index just crashed the most ever, surpassing even the credit crunch at the peak of the Lehman crisis.
This can be seen on the chart below.


And without any new credit entering the economy, a recession is all but assured.
More details on what may be the most critical and completely underreported indicator for the US economy. The report continues, with such a dire narrative that one wonders how it passed through the US Ministry of Truth's propaganda meter:

By far the most disturbing is the rejection of credit applications as this has fallen from an already weak 48.1 to 42.9. This is credit crunch territory—unseen since the very start of the recession. Suddenly companies are having a very hard time getting credit. The accounts placed for collection reading slipped below 50 with a fall from 50.8 to 49.8 and that suggests that many companies are beyond slow pay and are faltering badly. The disputes category improved very slightly from 48.8 to 49, but is still below 50. This indicates that more companies are in such distress they are not bothering to dispute; they are just trying to survive. The dollar amount beyond terms slipped even deeper into contraction with a reading of 45.5 after a previous reading of 48.4. The dollar amount of customer deductions slipped out of the 50s as it went from 51.8 to 48.7. The only semi-bright spot was that filings for bankruptcies stayed almost the same—going from 55.0 to 55.1. This is the one and only category in the unfavorable list that did not fall into contraction territory and that suggests that there are big, big problems as far as the financial security of these companies are concerned.

For those who enjoy tables, here it is:


Just in case there was still confusion about what is truly going on when one strips away the daily "S&P500 is at all time highs" propaganda and iWatch infomercials, here is some more doom and gloom from the source:

As stated earlier, the real concerns start to manifest with the unfavorable categories. The rejections of credit applications fell out of the 50s with a resounding thud—going from 50.3 to 43.8. There is most definitely a credit crunch underway and it is now easy to determine what the prime factor is. There are many companies seeking credit that are too weak and there is obviously an abundance of caution showing up in those that issue that credit. The accounts placed for collection held fairly steady and that comes as a bit of surprise—it went from 51.8 to 51.4. The disputes category actually improved a little—going from 47.2 to 48.6, but the important point is that it is still in the contraction category. The dollar amount beyond terms slid drastically from 52.2 to 46.0 and the dollar amount of customer deductions remained stable but at a low rate—moving not at all from the 48.7 that was noted last month. There was also no change in the filings for bankruptcies as it stayed right at 55.1—same as last month.

The big news is access to credit. It is suddenly very hard to get and this looks like the situation that existed at the start of the recession in 2008. The overall economy didn’t look all that bad in late 2008, except that there was a dearth of credit and that soon led to business failures and struggles.

...

The pattern is the same whether one is discussing the manufacturing or service side—too many seeking credit that are not going to get what they are seeking—either because there are doubts as to their credit status or because those issuing credit are in a very cautious mood. The dollar collections category is more or less stable and still in the 60s—it went from 61.0 to 60.4.

And the stunner:

The rejections of credit applications is as miserable as it has been since the depths of the recession—going from 45.9 to 42.0.These are very bad readings and it will take a good long while to climb out of this mess.

No other commentary necessary.