credit risk 061117

  • 95% of banks view retail industry credit risks as “significantly greater” or “moderately greater” than in previous cycles (Moody’s Investor Service).
  • 2017 retail store closings are somewhat quietly on pace to surpass levels seen during both 2008 and 2009 when we were experiencing an historic financial crisis.
  • Stalwart retailer Bed Bath & Beyond shares were down 12% today on a worsening sales outlook. Consumers are choosing to buy fewer “things” on net and more of what they do purchase is from a decreasing number of mega cap online providers.
  • Online purchases due to technology advancements can explain part, but not all, of the ongoing retail “fall from grace.”
  • Consumers are stretched from elevated real estate, healthcare, and education costs. The Fed’s bloated balance sheet promoted the same stretched asset prices that are now harming consumers and posing correction risk.
  • Overcapacity fears in the retail and energy sectors are beginning to seep into investor sentiment and inflation expectations.
  • Assist FX sees the Fed keeping interest rates on hold through at least September in order to provide a large enough window to begin trimming its balance sheet.
  • The Fed will initiate a gradual, mild, balance sheet reduction in 2H2017 as outlined in the June FOMC policy decision. This could begin as early as September. Even doves such as Evans and Bullard are nearly ready to begin tapering asset purchase reinvestment.

Bottom Line:

Previous calls from Assist FX of a low volatility grind higher in US stock indices were accurate. It is now time to increase caution modestly and move to a more neutral stance in US equity indices, long duration Treasuries, and USD. Bond market volatility should increase headed into the Fed’s asset purchase reinvestment trimming, which we are calling “Taper 2.0.” A cyclical increase in volatility will incur within the context of the secular decline previously discussed by Assist FX. This means volatility will not always be low; it will however be lower than it would have otherwise been in a previous era.