Industry News, Articles and Events Blog

The Butterfly Effect

3/10/2020

The market is waking up to not just the viral contagion of coronavirus, but also to financial, economic, and geopolitical contagion.

by Scott Minerd, Guggenheim Partners

The market is finally waking up to the prospects of not just viral contagion from coronavirus, but also to financial and geopolitical contagion. Now the contagion is spreading rapidly into the credit markets where not only energy bonds are plunging but other sectors like airlines, lodging, and retail are sure to follow suit. Then there is the knock-on effect to corporate earnings and cash flows across a broad swath of industries once the world enters a global recession which now appears to be inevitable. We

arrive at this moment with the overleveraged corporate sector about to face the prospect that new-issue bond markets may seize up, as they did last week, and that even seemingly sound companies will find credit expensive or difficult to obtain. Credit spreads have a long way to expand. BBB bonds could easily reach a spread of 400 basis points over Treasurys while high yield would follow suit with BB bonds at 750 basis points over and single B bonds at 1,100 basis points over. The risk is that it could be worse. As for stocks, technical analysis suggests that there should be support around 2,600 on the S&P 500, but in a recession scenario a level closer to 2,000 could be the ultimate outcome.

0 Comments

Global CIO Note to Clients: Markets Infected by Coronavirus

2/28/2020

0 Comments

By Scott Minerd, Chairman of Investments and Global CIO

Scott Minard on CNBC

The impact of the coronavirus has made for a crazy couple of weeks in the financial markets. Bonds are comfortably below 2 percent and the 10-year Treasury yield is hovering around 1.3 percent. At the same time that long Treasury yields are making new historic lows, credit spreads, while widening, remain relatively tight. I am not saying the worst is over, but it is time to take a break and assess the next moves.

We are trying to buy as many high-quality longer-duration assets as possible at reasonable yields to help lengthen duration in the face of potentially lower rates, but 3 percent is becoming a difficult yield to reach. We are selectively adding to BB credits which we think are “money good” to certain accounts to enhance yield. Eventually, we may have an opportunity to add more risk assets to our client portfolios as economic growth slows around the world and corporate borrowers default. The chances of recession are rising rapidly, for which we are well positioned.

0 Comments

Global Central Banks Fueling a Ponzi Market

1/21/2020

0 Comments

Ultimately, investors will awaken to the rising tide of defaults and downgrades.

By Scott Minerd, Global CIO Guggenheim Partners

One of the topics that I am focused on in Davos is the deterioration in the quality of the corporate bond markets.

The disturbing trend is that despite the rally in risk assets in the prior year, the number of defaults rose by approximately 50 percent, according to data compiled by J.P. Morgan. Additionally, the number of distressed exchanges increased by 400 percent.

And let’s not forget downgrade risk of BBBs: today 50 percent of the investment-grade market is rated BBB, and in 2007 it was 35 percent. More specifically, about 8 percent of the investment-grade market was BBB- in 2007 and today it is 15 percent. It has more than quintupled in size outstanding, from $800 billion to $3.3 trillion. We expect 15–20 percent of BBBs to get downgraded to high yield in the next downgrade wave: This would equate to $500–660 billion and be the largest fallen angel volume on record—and would also swamp the high yield market.
Ultimately, we will reach a tipping point when investors will awaken to the rising tide of defaults and downgrades. The timing is hard to predict but this reminds me a lot of the lead-up to the 2001 and 2002 recession.

The prolonged period of tight credit spreads experienced in the late 1990s lulled investors into unwittingly increasing risk at a time they should have been upgrading their portfolios.

This brings to mind the famous observation by economist Hyman Minsky, who stated that stability is inherently destabilizing. That is to say that long periods of relative stability in risk assets causes investors to keep upping the risk during a long period of calm.

Ultimately, this leads to what he called a Ponzi Market where the only reason investors keep adding to risk is the fear that prices will be higher tomorrow (or in the case of bonds, yields will be lower tomorrow).

Daniel Kahneman observed this behavior in his own work, when he identified that investors’ fear of missing an opportunity induces them to buy when they should be selling.

Even though the recession clearly has been put off until 2021 and perhaps 2022, in the lead-up to the 2001 recession, credit deterioration started to be evidenced three years earlier in 1998 as defaults and credit spreads were rising.

This would sound like good news for yield starved investors and I would agree.

But patience will lead to bigger opportunities for disciplined investors who don't wander off into exotic asset classes or chase current returns.

Important Notices and DisclosuresThis material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.

©2020, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.

IZALE Financial Group is hereby authorized to use the copyrighted report “Global Central Banks Fueling a Ponzi Market” by Guggenheim Partners, solely for the purpose of posting on its company blog, found here.

0 Comments

Forecasting the Next Recession: How Severe Will the Next Recession Be?

4/15/2019

0 Comments

—Scott Minerd, Global CIO; Brian Smedley, Head of Macroeconomic and Investment Research; Matt Bush, Director

Recession Outlook Summary

Our Recession Probability Model rose across all horizons in the first quarter of 2019. While near-term recession probability is limited, the probability of a recession occurring over the next 24 months has more than doubled.
The deterioration in leading indicators, inversion of the yield curve, and tightening of monetary policy all contribute to rising recession risks. As we expect these trends to continue in 2019, we should see recession risk rise throughout the year.
We maintain our view that the recession could begin as early as the first half of 2020, but will be watching for signs that the dovish pivot by the Federal Reserve (Fed) could extend the cycle.
The next recession will not be as severe as the last one, but it could be more prolonged than usual because policymakers at home and abroad have limited tools to fight the downturn.
Credit markets are likely to be hit harder than usual in the recession. This stems from the record high ratio of corporate debt to GDP and the likelihood of a massive fallen angel wave.
When recessions hit, the magnitude of the associated bear market in stocks is driven by how high valuations were in the preceding bull market. Given that valuations reached elevated levels in this cycle, we expect a severe bear market of 40–50 percent in the next recession.

Recession Expectations Go Mainstream

Recession fears resurfaced at the end of 2018 as a combination of negative data surprises, communication blunders by the Fed, slowing growth overseas, and rising trade tensions triggered a selloff in risk assets that led many in the market to fear a recession was imminent. While more dovish Fed communication and the recent market rebound have helped allay these fears, many are still left wondering if a recession is around the next corner. We don’t think so. Our recession forecasting tools continue to point to the same timing as they have over the past year and a half: recession risk in the near term is moderate, but the next recession could begin as early as the first half of 2020.

Scott Minerd discusses his economic outlook and the possibility of a financial accident in 2019.

Read Full Report

Important Notices and Disclosures

Investing involves risk, including the possible loss of principal. This material is distributed for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This article is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.

IZALE Financial Group is hereby authorized to use the copyrighted report “Forecasting the Next Recession: How Severe Will the Next Recession Be?” by Guggenheim Partners, solely for the purpose of posting on its company blog, found here.

0 Comments

Hazards of the Next Two Years

8/23/2018

0 Comments

Economic Wisdom From Guggenheim Partners

Macroeconomic and Investment Research

In this five-part video series, Brian Smedley, Head of Macroeconomic and Investment Research, discusses how investors can navigate a broad range of market risks as we approach the end of the current business cycle.

Part 1: Credit Cycle Downturn
The markets will be tested by passive investors’ reaction to ratings downgrades.
Watch Video

Part 2: Crowding Out
Government borrowing and the Fed balance sheet runoff are flooding T-bill supply, contributing to rising rates, and affecting other borrowers.
Watch Video

Part 3: Oil and Geopolitical Risk
Geopolitical tensions could give rise to substantial supply disruptions.
Watch Video

Part 4: The Pig in the Python
The transitory effects of fiscal stimulus won’t offset a slow growth outlook.
Watch Video

Part 5: Navigating Your Portfolio
Ideas for portfolio positioning amid tight credit spreads and a flattening yield curve.
Watch Video

Brian Smedley

About The Guggenheim Expert

Brian Smedley has been Managing Director and Head of Macroeconomic and Investment Research at Guggenheim Investments, Inc. since November 16, 2015. Mr. Smedley joined Guggenheim Investments from Bank of America Merrill Lynch, where he served as its Director of U.S. Rates Research. He served as United States Rates Strategist since June 2010. Prior to this, he spent five years at the Federal Reserve Bank of New York, including Senior Trader and Analyst for the Buy-Side Analysis and Relationship Management Staff and Foreign Exchange and Investments Staff, and Senior Economic Analyst for the Emerging Markets and International Affairs Group. Previously, he was employed at the FX desk and in the emerging markets group as a Senior Economic Analyst covering Latin America macroeconomics, commodity markets, and sovereign risk issues. He served as Director of BofA Merrill Lynch. As a graduate student he worked at the U.S. Treasury Department and the White House Council of Economic Advisers. He ranked number three in the Short Duration category of the Institutional Investor Fixed Income Research survey in 2011 and 2012. Mr. Smedley graduated Summa cum Laude with a B.S. in Finance and Economics from Utah State University and an MA in International Development Studies from the Elliot School of International Affairs at George Washington University.

Important Notices and Disclosures

Investing involves risk, including the possible loss of principal. This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author or speaker, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.

© 2018 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.

IZALE Financial Group is hereby authorized to use the copyrighted report “Hazards of the Next Two Years,” by Guggenheim Partners, solely for the purpose of posting on its company blog, found here.

0 Comments

<<Previous

Blog

The Butterfly Effect

Global CIO Note to Clients: Markets Infected by Coronavirus

Global Central Banks Fueling a Ponzi Market

Forecasting the Next Recession: How Severe Will the Next Recession Be?

—Scott Minerd, Global CIO; Brian Smedley, Head of Macroeconomic and Investment Research; Matt Bush, Director

Hazards of the Next Two Years

Economic Wisdom From Guggenheim Partners

IZALE Financial Group

Archives

Categories

Client Log-In

Contact