Category Archives: Economy and Meltdown

US Medicare-For-All & Big-Tech: The Future Of Mass Patient Surveillance

Authored by Tho Bishop via The Mises Institute,

As tech executives continue to be grilled in front of Congress, the growing Bernie Sanders-wing of the Democratic Party is preparing to push its misnamed “Medicare for All” into the political mainstream after its political gains in the midterms. While these two stories seem to have very little in common, it’s not difficult to imagine a not-so-distant future where the two are dangerously connected. After all, so long as the scope of government grows, the continued politicization of all aspects of life will follow – the inevitable consequences of which could be quite horrific.

The State’s Shadow over Silicon Valley

First let’s consider some of the overlooked causes behind the increased censorship from Silicon Valley.

While Republican politicians relish in collecting cheap soundbites railing against the censorship practices of widely despised tech executives, few are willing to point out the obvious influence of government in Big Tech’s growing hostility to free speech.

For example, just recently Facebook announced it was following the lead of Tumblr by cracking down on “sexualized content” on its platform. While both decisions were widely ridiculed by users and pundits alike, largely ignored was the role that recent Congressional laws aimed at cracking down on sex trafficking played in sparking the new policy. Similarly, “anti-hate speech” laws from Europe had very real consequences for American social media users as mechanisms designed to police speech oversees are inevitably used to manage content throughout their global communities.

While tech censorship began with isolated bans on individual social media platforms, it has evolved over time into a far more sinister crackdown of modern-day thought criminals. Alex Jones, for example, saw multiple social media accounts closed in a coordinated campaign earlier this year in what’s been likened to a modern version of Orwell’s “unpersoning.” Increasingly we are seeing financial services platforms, such as PayPal and Patreon, become another particularly effective form of censorship for those found guilty of violating the norms of political correctness.

The traditional libertarian response to these issues is to simply build another platform, but that seems increasingly impotent in the face of the union between Big Tech and state.

Gab, for example, is a product that arose in direct response to increased censorship on Twitter. The app has found itself deplatformed from both major phone app stores, even before user Robert Barnes killed 11 people at a Pennsylvania synagogue earlier this year and heightened law enforcement’s attention to the site. It’s worth noting that Facebook, a prolific donor to America’s political class, did not receive similar treatment when it was used to broadcast torture and murder. Similarly, cryptocurrency exchanges have faced backlash from government officialstraditional financial services companies, and tech companies in their effort to build alternatives to state-controlled financial networks.

Of course the answer to this new era of Big Brother (Sister?) isn’t government regulation, as many on the populist right advocate. The history of government involvement in communication platforms has been one of increased censorship. Instead, the best way to confront the Silicon Valley’s censorship is to recognize the inherently perverse influence of government and pursue a separation of tech and state. For example, attack all forms of state privileges enjoyed by companies that don’t recognize freedom of speech: such as government contracts, and liability waivers. Additionally, allow private citizens to sue when companies violate their terms of service or mislabel themselves as “open platforms.”

Socialism and Political Correctness are a Dangerous Mix

Unfortunately instead of working to depoliticize tech, it’s far more likely that we will see increased politicization of other vital parts of American life – and perhaps none is more dangerous than that applied to healthcare.

While it is easy to mock the economic illiteracy of politicians like Alexandra Ocasio-Cortez, there is no question that her brand of democratic socialism is growing in popularity – and not just on the left. It’s worth remembering that only a few years ago candidate Donald Trump gave his own endorsement to a healthcare vision similar to that held by AOC and Bernie Sanders.  

Consider the troubling potential of a progressive government that drops all pretense of valuing free speech, and then giving that government complete control of the healthcare system.

While this perhaps sounds like the makings of an outlandish dystopian novel, imagine the sort of policies we’ve already seen come from the executive branch. Under the Obama Administration, we saw the use of the IRSDepartment of Homeland Security, and even intelligence agencies to target and punish political opponents. Meanwhile, the progressive left has increasingly identified those who believe the “wrong ideas” – such as skeptics of anthropogenic climate change – as dangerous threats guilty of the crimes equivalent to murder.

In an age where a new generation of doctors increasingly rejects the Hippocratic oath, a government take over of medical care – as the honest advocates of “Medicare for All” propose – could inevitably lead to politicized regulators making life and death decisions for Americans.

Now does this mean I think it’s likely that a President Ocasio-Cortez would instruct a “political death panel” to not provide Alex Jones with life saving treatment? Not necessarily. The issue, however, is that the greater control the state has on medicine, the more decisions are influenced by the concerns of government, rather than the needs of patients. In such a dark timeline, if socialized healthcare forced America to face the sort of medical rationing that Britain’s prized National Health Service has been reduced to, it would be fair to wonder if Gavin McInnes would receive the same sort of treatment as an Ezra Klein.

At the end of the day the more socialist a country is, the greater the danger in opposing the narrative of the state.

As Mises warned in Omnipotent Government:

Within a socialist community there is no room left for freedom…There can be neither freedom of conscience nor of speech where the government has the power to remove any opponent to a climate which is detrimental to his health.

Now obviously the US is far away from such a terrorizing future, and there are far more immediate threats than the specter of political death panels. Can we be so confident about China, with its new social credit system? Or even the UK with the previously mentioned stress placed on its health system, and its own growing political polarization? It’s fair to wonder. 

No matter where you are in the world, the danger is the same. Grow the scope of government and expand the weapons of the state that can be deployed against its political enemies.

It’s Big Tech today. Let’s not allow it be healthcare in the future.

Rich Americans Say Money Trumps Love In Relationships

Bloomberg has obtained a new report that reveals the truth about money and relationships in the upper echelon of society.

When searching for a significant other, 56% of rich Americans want someone with wealth, versus 44% who want to be “head over heels” in love, according to 1,000 respondents surveyed by Bank of America Corp.’s Merrill Edge.

“There’s a level of realism” for couples who face economic uncertainty and a lack of financial planning, said Aron Levine, head of consumer banking and Merrill Edge, which offers online investing. “How do you keep the love of your life if you can’t pay for a vacation?” he told Bloomberg.

The survey showed respondents heavily scrutinized the finances of potential partners, as many did not actively discuss their financial situation including addressing debt loads, salary, investments and spending habits with significant others.

Additional findings in the report include:

  • Affluent Americans are willing to put aside an average of $18,000 a year on saving and investing, more than they want to spend on rent or mortgage payments, their children’s education or travel.

  • The majority of respondents has no monetary goal in mind for milestones such as getting married or having a baby.

  • Almost three-quarters of respondents expect to get their investment guidance primarily through digital channels within five years.

Bloomberg notes the survey was conducted from Sept. 27 to Oct. 13, were mainly millennials (18 to 40 years old) with investable assets of $50,000 to $250,000, or investable assets of $20,000 to $50,000 and an annual income of at least $50,000. For those older than 40, respondents had investable assets of $50,000 to $250,000.

For the 44 million Americans (mostly millennials) that have student loan debt and face a future of economic uncertainties, it seems that the longstanding institution of marriage could become a thing of the past, all because money talks – especially in relationships.

Hanson: House Prices Are More Vulnerable Than Most Think

Submitted by Mark Hanson Advisors

Dear Fellow Housing Market Observers,

This is my last note of the year and it deals with house prices into the next cycle.

There are numerous similarities between the Bubble 1.0 era and the past several years. This essay reviews Bubble 1.0 and the present and draws on key parallels that drove house prices that few ever point out (i.e., this time demand wasn’t a feature of surging house prices; this time houses have been a forced savings account, which are key differentiators).

Even if house prices in the CS 20 drop 10% to 20%, I am not sure what that means in the context of record untapped home equity (as opposed to last bubble when everybody could extract every dollar of equity all the way up), a solid employment and wage backdrop, rates that have likely topped and technology that will blow open the buy-box in the next couple of years to include those 10s of millions with irregular income or artificially low credit scores.

I do, however, have a better idea on what this means to pure-play housing, finance, related-retail, appliance, etc, which I will be focusing on in 2019 along with my favorite tech, fintech and advanced credit companies aiming to add liquidity to the housing market and dive into Opportunity Zone ideas.

There are some great trades to be had.


* * *

The “Mortgage Loan House Price Governor” has been strapped on again.

The common thesis is that “it’s different this time”; house prices are largely protected from a sharp downturn like from 2008 to 2010 because post-crash lending has been conservative, buyers didn’t get over their ski’s, employment is strong, home-equity is at record highs and there have no exotic loans originated than can blow-up borrowers.

While all that may be true and sensical, end-users getting mortgages to buy their shelter homes aren’t the ones who provided most of the energy that pushed house prices past peak-2007 bubble levels in key regions from coast to coast.

I operate on the thesis that house prices will always gravitate to “end-user, mortgage-needing, shelter buyer” cohort affordability – based on ‘local’ employment, income & credit fundamentals and market rates – using a typical 30-yr mortgage & minimal down payment.

At times prices can detach from these fundamentals like from 2002-07 when “unorthodox demand using unorthodox capital & credit” became the main driver. But, they always reattach over time.

Case in point when all the high-leverage loan programs went away at the exact same time in 2007-08 and prices reattached to end-user fundamentals and traditional 30-year fixed-rate loans, which resulted in a 30%+ price drop.

But the 2011 to 2016 era wasn’t dissimilar from the 2002-2007 bubble. That is, “unorthodox demand using unorthodox capital & credit” became the main driver of demand and house prices…all those buy-to-rent, flip and floppers; institutions; foreign lock boxes; money laundering schemes; and EB5’s.

And based on the historical divergence between end-user affordability and house prices in top metros in the nation today house prices could fall at least 30% and only be fairly-valued. I have plenty of local level data & models proving this.

Unless rates fall/incomes rise sharply; the mortgage sector introduces higher leverage programs; unorthodox demand rushes back; or the sector evolves intelligently to include 10s of millions of prime-risk credits left out of the prohibitive FICO/DTI based credit boxes (this IS coming, but it might not be soon enough) my thesis will be tested soon.

The “Mortgage Loan House Price Governor”

1) In a normal housing market — ~ 80% of all purchases to end-users most using “full-doc” mortgage loans — prices are solidly rooted to end-user economic fundamentals. That is, the mortgage loan with its LTV and DTI guidelines is the “house-price governor”; it’s virtually impossible for house prices to detach from local economic employment and income fundamentals unless credit goes haywire. Sure, there have exceptions to this over the decades. But, overall housing has been a pretty simple asset class that for decades leading into the change of the millennium remained mostly in-check to fundamentals and a great inflation hedge.

2) Enter 2003 to 2007, when the “mortgage-loan, house-price governor” – a term I coined — was removed by the introduction and wide acceptance of exotic loans; i.e., stated-income for wage earners, interest only, pay-option arms, etc. Through the power of high-leverage lending the ‘incremental buyer’ always earned $200k a year and had a million dollars in the bank when it came to qualifying for a loan to buy a house…credit went ‘haywire’. This allowed house prices to completely detach from end-user fundamentals.

In 2008, when the mortgage loan governor was strapped back on – due to the sudden loss of all the exotic loans over a short period of time — house prices quickly “reset to end-user, employment and income fundamentals”. House prices stopped plunging in 2010, as affordability using new-era 30-year fixed rate, fully-documented loans recoupled with real income and asset levels.

This “bottom” should have set the stage for housing to once again be rooted to fundamentals / governed by contemporary mortgage lending guidelines.

But, that didn’t happen.

3) Enter the mortgage mod craze. Millions of the worst mortgage offenders and house over-spenders were bailed-out through Government and bank sponsored 2% interest-only mortgage mods, so exotic they would have made Lehman and Bear blush.

Instead of these homeowners experiencing foreclosure, renting, replenishing savings and becoming de-levered, credit-worthy boomerang buyers down the road several years, they got to squat in their own home at 2% interest only for five years before their rates started adjusted higher, squeezing them all over again. In fact, mod annual rate increases began in earnest in 2016 and are still occurring every year.

4) Don’t forget in places like the Bay Area how tech companies with double-decker busses have been exporting high Bay Area incomes to adjacent counties an hour or two away where the native population makes half as much. This artificially pushes prices up in the metro periphery, forces out legacy owners and is an implosion waiting to happen in the next employment cycle downturn because the local economies don’t support house prices 50% higher than local employment and income fundamentals.

5) But, overshadowing all this, from 2010 to 2016, the “all-cash”, new-era “spec-vestor” phenomena developed, which in my eyes was a repeat of the 2003 to 2007 exotic loan era in the effect it had on house prices. That’s because the incremental (almost majority) all-cash buyers work without a ‘house price governor’, instead base their purchase and pricing decisions on individual, random, emotional, uneducated, criminal or hopeful models or guesses.

Some bought for rental income, some for appreciation, others to flip, flop, hide money from foreign governments, or to simply beat the yield of a 2% 10-year Treasury. In any case, without a mortgage loan governor the “price” they pay for a house is often subjective vs objective.

Most analysts disregard the all-cash investor demand and supply cohort because they look at companies like Blackstone and Starwood and say, “these institutions only own 500k houses, not enough to make a difference”.

But what they fail to take into consideration is that those 500k houses are highly concentrated within eight to ten major metros. Furthermore, all of the other spec-vestor cohorts – like small two to ten house independent speculators – out purchased institutions by ten-fold from 2011 to 2016. In fact, there have been over six million single family homes taken out of the end-user owner category and turned into rentals, thus the “lack of supply” screed, artificial as it may be, everybody repeated for years.

In the “all-cash”, “spec-vestor” segment, it was very easy to overpay for a house by 20% or 30% in the heat of the deal and when competing against a dozen other all-cash buyers. This is impossible if end-users, mortgage loans and appraisals are required because when end-users overpay, or bid higher than the appraised value, they must come up with the difference in cash, which few have.

As the bubble blew in key markets around the nation and prices become ever further detached from end-user fundamentals there were always greater fools that chased the market keeping it elevated for a period. But, outside of the all-cash cohort the number is finite.

Some will say “all-cash buyers for rentals are rooted to fundamentals…that’s rents”. I say “hogwash”. I have seen many of the single-family rental assumption models from some of the largest investors, and they are beyond rosy. I can easily change two numbers and turn their 6% cap rate into an 6% loss.

Bottom line: It was very easy for demand cohorts – as large as this era’s all-cash insti, private and foreign segments – to push national house prices well above what the average end-user can pay.

And that’s exactly what happened from 2011-16 and why in leading indicating regions from coast to coast in which new-era investors flocked first, demand is plunging and supply surging against a backdrop of rising rates. Just like in 2006/7.

If history rhymes at all, house prices have already gapped down — the lagging indices just haven’t printed it yet — and house prices are more vulnerable than most think.

US Commits To “Indefinite” Occupation Of Syria; Controls Region The Size Of Croatia

“We don’t want the Americans. It’s occupation” — a Syrian resident in US-controlled Raqqa told Stars and Stripes military newspaper. This as the Washington Post noted this week that “U.S. troops will now stay in Syria indefinitely, controlling a third of the country and facing peril on many fronts.”

US forces in Syria, via ABC News

Like the “forever war” in Afghanistan, will we be having the same discussion over the indefinite occupation of Syria stretching two decades from now? A new unusually frank assessment in Stars and Stripes bluntly lays out the basic facts concerning the White House decision to “stay the course” until the war’s close:

That decision puts U.S. troops in overall control, perhaps indefinitely, of an area comprising nearly a third of Syria, a vast expanse of mostly desert terrain roughly the size of Louisiana.

The Pentagon does not say how many troops are there. Officially, they number 503, but earlier this year an official let slip that the true number may be closer to 4,000.

A prior New Yorker piece described the US-occupied area east of the Euphrates as “an area about the size of Croatia.” With no Congressional vote, no public debate, and not even so much as an official presidential address to the nation, the United States is settling in for another endless occupation of sovereign foreign soil while relying on the now very familiar post-911 AUMF fig leaf of “legality”.

Like the American public and even some Pentagon officials of late have been pointing out for years regarding Afghanistan, do US forces on the ground even know what the mission is? The mission may be undefined and remain ambiguously to “counter Iran”, yet the dangers and potential for major loss in blood and treasure loom larger than ever. 

According to Stars and Stripes the dangerous cross-section of powder keg conflicts and geopolitical players means “a new war” is on the horizon:

The new mission raises new questions, about the role they will play and whether their presence will risk becoming a magnet for regional conflict and insurgency.

The area is surrounded by powers hostile both to the U.S. presence and the aspirations of the Kurds, who are governing the majority-Arab area in pursuit of a leftist ideology formulated by an imprisoned Turkish Kurdish leader. Signs that the Islamic State is starting to regroup and rumblings of discontent within the Arab community point to the threat of an insurgency.

Without the presence of U.S. troops, these dangers would almost certainly ignite a new war right away, said Ilham Ahmed, a senior official with the Self-Administration of North and East Syria, as the self-styled government of the area is called.

“They have to stay. If they leave and there isn’t a solution for Syria, it will be catastrophic,” she said.

But staying also heralds risk, and already the challenges are starting to mount.

So a US-backed local politician says the US can’t leave or there will be war, while American defense officials simultaneously recognize they are occupying the very center of an impending insurgency from hell — all of which fits the textbook definition of quagmire perfectly.

The New Yorker: “The United States has built a dozen or more bases from Manbij to Al-Hasakah, including four airfields, and American-backed forces now control all of Syria east of the Euphrates, an area about the size of Croatia.”

But in September the White House announced a realignment of its official priorities in Syria, namely to act “as a bulwark against Iran’s expanding influence.” This means the continued potential and likelihood of war with Syria, Iran, and Russia in the region is ever present, per Stripes:

Syrian government troops and Iranian proxy fighters are to the south and west. They have threatened to take the area back by force, in pursuit of President Bashar Assad’s pledge to bring all of Syria under government control.

Already signs of an Iraq-style insurgency targeting US forces in eastern Syria are beginning to emerge. 

In Raqqa, the largest Syrian city at the heart of US occupation and reconstruction efforts, the Stripes report finds the following:

The anger on the streets is palpable. Some residents are openly hostile to foreign visitors, which is rare in other towns and cities freed from Islamic State control in Syria and Iraq. Even those who support the presence of the U.S. military and the SDF say they are resentful that the United States and its partners in the anti-ISIS coalition that bombed the city aren’t helping to rebuild.

And many appear not to support their new rulers.

We don’t want the Americans. It’s occupation,” said one man, a tailor, who didn’t want to give his name because he feared the consequences of speaking his mind. “I don’t know why they had to use such a huge number of weapons and destroy the city. Yes, ISIS was here, but we paid the price. They have a responsibility.”

Recent reports out of the Pentagon suggests defense officials simply want to throw more money into US efforts in Syria, which are further focused on training and supplying the so-called Syrian Democratic Forces (or Kurdish/YPG-dominated SDF), which threatens confrontation with Turkey as its forces continue making preparations for a planned attack on Kurdish enclaves in Syria this week.

Meanwhile, Raqqa is beginning to look more and more like Baghdad circa 2005:

Everyone says the streets are not safe now. Recent months have seen an uptick in assassinations and kidnappings, mostly targeting members of the security forces or people who work with the local council. But some critics of the authorities have been gunned down, too, and at night there are abductions and robberies.

As America settles in for yet another endless and “indefinite” occupation of a Middle East country, perhaps all that remains is for the president to land on an aircraft carrier with “Mission Accomplished” banners flying overhead?

JPMorgan: There Is A Growing Threat Of “Disorderly Transfer Of Risk” In Credit

A curious divergence has emerged within the analyst ranks at JPMorgan, where on one hand there are the bulls such as cross-asset and quant heads, John Normand and Marko Kolanovic, and equity strategists like Mislav Matejka, all of whom are urging clients to remain bullish and carry on buying stocks while ignoring the recent turbulence in the market; on the other hand there are the lone quasi-bears like Nikolaos Panigirtzoglou who writes one of the bank’s most popular weekly reports, Flows and Liquidity, and who has a habit of going against JPM’s optimistic so-called “house view.”

In an ironic twist, Panigirtzoglou’s less than “rose-colored” takes on the market come at a time when Marko Kolanovic recently lashed out at anything that is less that ragingly bullish as “fake news”, and not just fake but having a greater impact on the market than JPMorgan’s own official research, to wit:

There are specialized websites that mass produce a mix of real and fake news. Often these outlets will present somewhat credible but distorted coverage of sell-side financial research, mixed with geopolitical news, while tolerating hate speech in their website commentary section. If we add to this an increased number of algorithms that trade based on posts and headlines, the impact on price action and investor psychology can be significant.

Amusingly, and perhaps to front-run attacks on his own research, just hours after Kolanovic published the above “hot take” (which came as he was again calling for JPM clients to “buy the dip”, and ahead of the market’s latest rout), Panigirtzoglou wrote the following disclaimer in his latest weekly report:

As a note to our readers, the above analysis does not represent JPM’s official views/forecasts about US share buybacks. These JPM official forecasts are more positive and are outlined in the reports by our US equity strategists (Dubravko Lakos-Bujas and team). Instead, the objective of our analysis is to highlight risks around the house view.

In other words, JPM’s bearish takes are not “fake news” – they are just meant to provide cover when the house’s “more positive” forecasts for popular consumption – end up being wildly wrong (that, and to tell the more “perceptive” clients what JPM really thinks).

Not surprisingly, we find Panigirtzoglou’s “less positive” if more accurate and thought-out research reports far more informative than the “more positive” JPMorgan “official view”, which in turn brings us to his latest weekly note which this time takes on the topic of rising downgrade risk within the high grade sector, a topic near and dear to us as just yesterday we pointed out that in the fourth quarter alone, some $176 billion in A-rated debt was downgraded into BBB territory according to Goldman calculations, “the highest amount since 4Q2015, which was a period characterized by a heavy wave of commodity-related “fallen angels.”

The reason why Panigirtzoglou is also focused on the sensitive topic of fallen angel downgrades, is because as he explains with the credit cycle turning (and entering a bear market according to Morgan Stanley) and High Grade credit spreads making new highs in both the US and Europe (where spreads are now at the same level they were when Draghi launched QE back in 2016)…

… “one of the issues credit investors are facing is that of rating downgrades and fallen angels, i.e. corporate bonds downgraded
from investment-grade status.” This, as the JPM strategist explains, is not because rating downgrades or fallen angels have forecasting ability in terms of gauging the direction of the credit cycle – on the contrary they tend to rather lag the credit cycle –  but they are important in gauging the negative impact on credit returns: This, as we have explained previously, is because rating downgrades or fallen angels “drive a wedge between spread returns and total returns as the managers who are only allowed to hold investment grade bonds are forced to offload their downgraded bonds.”

So how big are the rating downgrade or fallen angel effects? The good news, is that at the moment, the answer is “pretty small.”  In fact, these rating downgrade or fallen angel effects have barely started because, as the chart below shows, the number of fallen angels in JPMorgan’s global high yield dollar denominated index still stands at very low levels typically seen at the beginning of a credit cycle (this is a far lower number than the abovementioned surge in downgrades from A to BBB, or credits which can be dubbed pre-fallen angels).

A quick look at rating downgrades reveals a similar picture because like with fallen angels, corporate downgrade reviews have yet to rise materially.

As a result, while many have expressed concern about the threat from future downgrades, the realized negative impact that downgrades and fallen angels typically exert on credit returns has yet to hurt credit investors in a big way.

So are current concerns by traders and market participants about rating downgrades/fallen angels justified?

This is where the abovementioned internal dichotomy in JPM’s views would emerge, because while we would expect Kolanovic to respond firmly in the negative, Panigirtzoglou believes the answer is yes if one simply looks at credit fundamentals such as debt-to-income ratios. In fact, as the JPM strategist writes, “a visual inspection of debt-to-income ratios across the universe of companies behind corporate bond indices reveals a highly problematic picture.”

The four charts below show the net debt-to-EBITDA ratio for companies behind JPMorgan’s HG and HY indices in both the US and
Europe. Panigirtzoglou warns that the leverage metric has been rising steeply over the past decade to levels that are much higher than those seen at the peaks of the previous two cycles in 2007/2008 and 2001/2002.

In other words “companies are currently much more vulnerable to a decline in incomes and/or rise in interest rates that in the previous two cycles.”

This is especially true in the US where the Fed hikes coupled with its balance sheet shrinkage have pushed corporate bond yields close to the 5% mark, creating vulnerability for credit in a risk scenario where earnings contract next year. In Europe, a similar demand/supply balance problem looms for corporate bonds next year when the ECB ends its corporate bond program on Jan 1.

Narrowing the observations down to just BBB companies, which currently account for more than half of the HG corporate bond universe, look equally vulnerable.

As laid out in the two charts below, the median net debt-to-EBITDA ratio for companies in JPMorgan’s BBB indices in both the US and Europe has also risen for BBB corporates to above the peaks of the previous two cycles especially in Europe. More importantly if one looks at the portion of BBB companies with net-debt-to-EBITDA ratio higher than the BB average of 2.3 in the  US and 2.6 in Europe since 2001, JPM finds that this portion stands at 55% currently in both the US and Europe, or at the highest level in at least two decades.

At face value, from a net-debt-to-EBITDA point of view – and much more concerning from a future downgrade standpoint – more than half of BBB companies in the US and Europe look more like high yield than high grade.

And this is why to Panigirtzoglou this suggests that “the downgrade and fallen angel risks look pretty elevated at the moment for both US and European high grade corporates, raising the prospect of disorderly transfer of risk between HG and HY markets over the coming year.

This is a problem because as Bank of America first pointed out back in June, in Europe alone JPM estimates that roughly €100 – 120bn of bonds could be downgraded from investment grade to high yield during the next recession. This would cause the Euro high yield market to balloon in size by at least a third from the current notional of just over €300bn.

In October, Morgan Stanley applied a similar calculation to corporate bonds in the US, and found that over $1 trillion in IG bonds could be downgraded to High Yield once the cycle turns.

Summarizing the above, Panigirtzoglou concludes the because of these capacity problems, a “disorderly transfer of risk” between  HG and HY markets is an increasingly greater threat to the credit market (which already has its hands full with the sudden repricing and turmoil sweeping across the leveraged loan market). Or, as Kolanovic would say “fake news.”