Equites slid on the news that two regional banks took a credit charge on the same company, rising concerns about overall credit quality. The charge offs were the result of fraud to loans that invest in distressed commercial mortgages.
While the charge offs are relatively insignificant in the scope of things and are believed to be isolated events, Wall Street remembers the mini crisis of two and half years ago that sank two similar size banks.
These charge-offs came after the dramatic and unexpected collapse of subprime auto lender Tricolor and auto supplier First Brands raised questions about underwriting criteria and standards.
Gold continued its unrelenting advance. Short term Treasuries rallied considerably on remarks by several Federal Reserve officials causing a moderate steepening in the yield curve.
The narrative is beginning to rise about the potential risks of sovereign debt which now stands at 95% of global gross domestic product according to Bloomberg.
Deficits increased from 3.5% of global output and 84% of global GDP in the year before the pandemic to 9.5% in 2020. It was expected it would contract after the pandemic ended.
In country after country—including the US, the UK and most of the European Union—it is on track to keep growing faster than output, a dangerous environment.
Eventually, a combination of protracted indiscipline, bad economic news and souring financial markets can dig countries into a hole so deep that the only way out is some form of debt default, either explicit or disguised by high inflation. In other words, inflate or die [default].
Most including the Federal Reserve believe that reforms must be enacted now before the emergence of a crisis.
The shutdown is a vivid example of Washington’s inability to curtail spending. It is not a revenue issue but rather a spending issue.
What will happen today?
Last night the foreign markets were down. London was down 1.12%, Paris down 0.15% and Frankfurt down 1.70%. China was down 1.95%, Japan down 1.44% and Hang Seng down 2.48%.
After being down almost 2%, Dow and NASDAQ futures are down 0.1% and 0.5%, respectively, as the Administration moved to calm fears of a trade war with China and the rethinking credits issues. The 10-year is off 2/32 to yield 3.99%.
