Updating the key stats that I monitor; Based on what I have observed, we are already in a recession, engineered by monetary policymakers fighting inflationary forces through tightening policies.
I would probably not bet on a prolonged, full-blown US depression as except GOV debt level, the private sector’s leverages, in general, are not at an extreme level. However, a pocket or two overleveraged sectors would get decimated by the suddenly elevated borrowing cost and tightening credit access.
Starting with risk-free rates, 3-month to 5-yr risk-free cost of capital rates are all at elevated levels compared to 30-yr historical averages, with the shorter duration sides having much higher spreads over the norms. The longer-duration sides are still at below-historical average levels. Treasury & banks would be better off borrowing through long-duration instruments. (Or heck, to borrow as little as possible from the banks’ perspective);
If interpreting from someone who wants no default risk at all providing capital, he’s encouraged to store his capital at the shorter-duration sides.
Next looking at corporate debt risk premiums, all durations are at historical levels. Some interesting thoughts: A. from the corp borrowers’ perspectives, it is especially attractive now to borrow at mid to long-duration ranges since RFRs are on par or at discounting levels AND DRPs are cheap; B. from capital providers’ perspectives, one is better off to skip this category entirely & wait for a better point since not enough DRPs in the short-end ranges AND RFRs are at discount levels in the long-end ranges + not enough DRPs.
Even if a fixed-income guy lowers his credit risk standard, the premium is still not there to compensate him fairly:
On equity risk premiums, they are simply not here at this price level market-wise…
Onto the rate future market, compared to Aug 2022, the curve got more steeply inverted; Now it is expecting the 3-month rate to go up slightly above 5% & to stay there for 2 Quarters, then to quickly revert back to 3 – 4% in 2024 & 3% after.
Central banks B/S monitoring
US:
CA:
All US Banks aggregating:
All Canada Banks aggregating:
Gov Debt Interest Cost
Interest % total Receipt in FY 2022 (end of Sep) takes up ~12%. Not bad compared to the historical level; However, if only looking at Nov 2022, net interest cost went up by 56% to Nov 2021; Net interest % of total receipts stands at 18% compared to 10% in Nov 2021.
In sum, the clock is ticking. Raising the rate at this Gov debt level & running at a deficient, interest will eat into the receipts at an accelerating rate.
