Failing Fundamentals

Posted By Darren Winters on Apr 28, 2020

Failing Fundamentals

Failing fundamentals are likely to become more of a theme going forward in the post-global-lock-down phase.

There could be too many uncertainties to hope for a V-shaped recovery, albeit in the short term.

The view that pent-up consumer demand will suddenly jolt the global economy into a boom, which was already tinkering into a recession before the lock-down, could be a foolhardy one.

Here is my fifty cents worth; the global pandemic has set the dominoes in motion as news of failing fundamentals become more apparent going forward.

America’s unemployment rate is forecasted to reach 32%, or 47 million job losses, and that is likely to set off a chain reaction of events and failing fundamentals.

Lackluster demand for bellwether commodities, a sign of failing fundamentals put an end to the commodity supercycle, which was a secular bull market in commodities that reached its peak in 2011

Failing Fundamentals

The price of bellwether commodities, such as oil and copper have been used to gauge the macroeconomic performance of the economy. So Typically, when the price of bellwether commodities is high the economy tends to be performing well and vice versa.

April’s negative crude WTI will be remembered for when black gold became a hot potato where investors paid to avoid oil storage costs. The oil glut is soaking up available storage as even oil tankers are being used as floating storage vessels with their daily storage price rocketing to 130,000 USD per day for a sixth month charter period, which compares to a rate of about 85,000 USD per day.

In short, failing fundamentals are playing out in the oil market due to a simultaneous supply and demand shock

The latter has been triggered by a global lock-down and quarantine which has paralyzed air, ground travel, and the former was caused by an OPEC (oil producers) walkout on supply cuts and oversupply.

So the failing fundamentals in the oil market are toppling energy bank loans and energy bonds, a market where US shale is estimated to be worth $200 billion.

Oil losses are already mounting with the bank of China clients losing over $1 billion during the oil crash, many investors ending up owing the bank money.

Non-performing energy loans could trigger a wider credit squeeze spinning off into the small business loans market as banks are forced to raise collateral and tighten credit to strengthen their balance sheet. So the subprime mortgage default, which was the catalyst for the 2008 financial crisis could be played out again, but this time in the larger energy market and beyond.

Failing fundamentals have already led to a sharp spike in unemployment and loan defaults

Standby for a wave of nonperforming auto loans as consumers skip payments and unsold cars pile up on dealership lots.

Credit Acceptance Corp., the lender to car buyers with subprime credit scores, warned that it’s seeing a sharp drop-off in payments as people shift their financial priorities to get through the coronavirus pandemic. As unemployment soars, borrowers are putting off payments or “reallocating resources,” Credit Acceptance said in a regulatory filing Monday, explaining that it needs more time to publish a quarterly report. New lending is also slowing as dealerships across the US are forced to shutter their lots, the company said. New credit applications are collapsing to 2008 levels.

So Carmageddon II, which is loosely defined as dismal demand for passenger cars could now be in play. 

But what about the retail brick and mortar meltdown, which I also reported back in February 2019.

The Carmageddon and the retail apocalypse was already in play before the 2020 pandemic.

So how many brick and mortar retailers will survive the post-lock-down?

Already nine retailers and restaurant chains have filed for bankruptcy or liquidation since 2020. 

Papyrus and Modell’s are two major names that are expected to shut down all remaining stores. 

Failing fundamentals in the retail brick and mortar as the Amazon effect accelerates post-lock-down could trigger a wave of loan retail defaults

Moreover, residential real estate is likely to come under similar pressures as experienced during the 2008 financial crisis. Great Depression levels of unemployment could freeze mortgage lending, and if so, the real-estate bubble could be about to burst. Tom Barrack whose Colony Capital owns a $50 billion real estate portfolio summed up the current US real estate mood in his recent business interview.

The US property market is in “chaos,” said Tom Barrack. Real estate is on the verge of collapse because the federal government and local authorities are allowing renters and homeowners to skip payments due to the coronavirus, according to Tom Barrack.

Failing fundamentals in the residential real estate space have forced Moody’s, a well-known rating agency, to come out and say that they are forecasting 30% of all mortgages will default in the near future

Moody’s mortgage warning meltdown is based on a sharp rise in US unemployment. Even in a best-case scenario, job losses will persist long after coronavirus has been contained, argues Moody’s. Small-time landlords will likely make up the bulk of the defaults.

Failing fundamentals are likely to set a chain reaction of events which could lead to a deflationary spiral, then a deflationary depression and eventually hyperinflation, if the Fed loses control and investors lose trust in the USD

As hopes of a V-shaped recovery fades so too will the bear market rally as failing fundamentals become apparent going forward and that could leave the path open for a secular bear market to continue. 

Perhaps, based on the failing fundamentals we could see the worst bear market in our lifetime, bearing in mind monetary and fiscal policy could already be cooked

If so, selling the strength rather than buying the dip could be the best play going forward.

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