The woman who nailed 2018 stock market volatility to blown up warns or "bubbliciouness" in loans
Nancy Davis, the chief investment officer and founder of advisory firm Quadratic Capital, garnered attention back in October 2017 when she predicted that a preternatural period of placidity in the stock market was about to come to an ugly end. Four months later, it did, in a spectacular fashion.
Then, amid renewed ebullience on technology and internet-related stocks, she cautioned in July that the U.S. market's bull run – notably among tech-centered shares – was set to come apart against the backdrop of a tumbling international market.
She was right about that, too.
Read: Which Wall Street forecasters should you list to now? Here's who nailed it in 201[ads1]8 (and who bombed)
That brings us to our call of the day from Davis, who told MarketWatch that corners of the debt market, particularly private credit markets like leveraged loans, "It is very bubblicious," Davis said. She also said that the complex purchases of loans, which are used to finance private-equity transactions, may be much of the current volatility exhibited by global equity markets.
The leveraged loan borrowing in the U.S. has quietly ballooned over the past two years, surging way beyond levels since during the 2007 financial crisis. Such borrowing in the U.S. hit a record in 2017 at $ 1.66 trillion and was at $ 1.46 trillion in 2018, according to Dealogic. That represents the biggest two-year growth ever in the industry (see table below).
| Year | U.S. leveraged loan borrowing $ mlns | No. of Deals | |||||||||
| 1995 | 181,068 | 904 | |||||||||
| 1996 | 232,064 | 1,179 | |||||||||
| 1997 | 332,460 | 1,751 | 1998 | 439,102 | 1998 | 439,102 | 2,051 | ||||
| 1999 | 425292 | 1920 | |||||||||
| 2000 | 392645 | 1801 | |||||||||
| 2001 | 256991 | 1376 | |||||||||
| 2002 | 308674 | 1398 [19659011] 2003 | 400,467 | 1,592 | |||||||
| 2004 | 503,570 | 1,930 | |||||||||
| 2005 | 635,452 | 2,119 | |||||||||
| 2006 | 804,202 | 2,284 | 804,202 | 2,284 | 804,202 | 2,284 | 804,202 | 2,284 | 2007 | 1,191,263 | 2238 |
| 2008 | 535568 | 1540 | |||||||||
| 2009 | 286045 | 1158 | |||||||||
| 2010 | 535619 | 1454 | |||||||||
| 2011 | 805613 | 2080 | |||||||||
| 2012 | 894348 | 2385 | |||||||||
| 2013 | 1,251,252 | 2821 | |||||||||
| 2014 | 1,117,911 | 2637 [19659011] 2015 | 960,170 [19659009] 2124 | ||||||||
| 2016 | 1,164,612 | 2,447 | |||||||||
| 2017 | 1,656,194 | 3,207 | |||||||||
| 2018 YTD | 1,458,577 | 2,923 | Source: Dealogic [19659084] Part of Davis's argument is that investors in leveraged loans are subject to multiple lockup periods where they cannot sell, which, as a by-product, forces those large investors to seek liquidity by selling public assets, such as stocks.
Check out: Here is why the stock market market is steady on January to steady the ship after quarterly earnings releases. But also, "it's just the popular thing to do, and in turn, it's going to mean more volatility" in other assets, she warned. "Private markets do not have liquidity, and that can create volatility in the stock market because when [investors] need cash they are going to go to the more liquid market," she said. Volatility may be the least of investors' concerns, however, with a number of strategists and analysts, including Moody's Analytics Chief Economist Mark Zandi, also sounding alarms about leveraged loans. Moody's Investors Service in October warned that the quality of those types of loans is terrible; Janet Yellen The [buzz]All eyes were on Apple AAPL, -9.25% on Thursday after iPhone iPhone shake up markets late Wednesday by announcing-than-expected iPhone sales. Apple said a slumping Chinese economy is the biggest problem for the tech behemoth, the only public U.S. last year before a fourth-quarter collapse for its shares. Read: Apple cuts holiday sales forecast on iPhone and China weakness, stock falls 8% The Cupertino, Calif.-based company is creating a sweeping rout in technology shares globally, including in companies like Qorvo QRVO, -9.87% Skyworks Solutions SWKS, -10.98% as well as Google-parent Alphabet Inc. GOOG, -2.51% GOOGL, -2.50% Netflix NFLX + 1.81% and chip makers like Micron MU, -5.01% and Nvidia NVDA, -5.67% Check out: up to Wall Street's fears with massive revenue shortfall Markets are also digesting a blockbuster $ 74 billion announced merger between Bristol-Myers BMY, -14.60% and Celgene [1 9659111] CELG, + 21.35% The marketThe Dow Jones Industrial Average S&P 500 and Nasdaq Composite all cratered as Apple and a woeful reading of ISM manufacturing fueled further concerns about softness in the global economy. Check out the latest in Market Snapshot Crude and gold The chartCurrency strategists were pointing to a mini flash crash in the yen versus the dollar in the aftermath or Apple's report. Here's one chart that shows the action (h / t Gregory Mckenna):  Random readsTeachers are quitting at the highest rate ever The US's partial government shutdown is nears its second week Twilight Providing critical information for the US trading day. Subscribe to MarketWatch's free Need to Know newsletter. Sign up here. |
