It is the 17th of September 2019

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"The Dreaded Phase 4": What Happens When Credit Spreads Finally Rise

With investors, traders, analysts and pundits focused on the chaos in the White House, and the daily barrage of escalating geopolitical and social news, whether terrorist attacks in Europe or clashes in inner America, the market is finally starting to notice as Friday's last hour sell-off demonstrated. And yet, according to one of the best minds on Wall Street today, Citi's Matt King, what traders should be far more concerned about, is not who is in the Oval Office or how bombastic the war of words between the US and North Korea may be on any given day, but rather what central banks are preparing to unleash in the coming months. To underscore this, two weeks ago, King made a stark warning when he summarized that we are now more reliant on central banks banks holding markets together than ever before:

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Shocking Admission From Global Head Of Strategy: "Our Clients Have Given Up On Valuation As A Metric"

For all the recent concerns about an "imminent" nuclear war with North Korea (not happening, according to the head of the CIA), which prompted a stunned reaction from Morgan Stanley which earlier today observed the "70% rise in the VIX index over three days, 2% drop in global equities, and more than a few holidays disrupted", leading it to conclude "Well, That Escalated Quickly", the market continues to ignore the real risk: the upcoming central bank balance sheet taper which will have a dire and drastic impact on markets according to Citi's global head of credit product strategy, Matt King:

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Accounting Change On Operating Leases To Add $3 Trillion In Debt To Corporate Balance Sheets

From a practical perspective, operating leases are pretty much the same as debt.  They reflect a contractual obligation on the part of one counterparty to make defined stream of cash payments to another over a set period and with an implied interest rate embedded in the payment stream.  In fact, within a bankruptcy context operating leases are treated exactly the same as debt and rank pari passu with the other general unsecured obligations of a business.  That said, accounting rules treat operating leases differently than debt and do not require them to be included as a liability on a company's balance sheet.  That is, until 2019.

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World's Largest Actively Managed-Bond Fund Dumps "Excessively Risky" Eurozone Bank Debt

Back in September, Tad Rivelle, Chief Investment Officer for fixed income at LA-based TCW, said in a note that "the time has come to leave the dance floor", noting that "corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle." Ominously, he added that “we’ve lived this story before.” Five months later, the FT reports that TCW, which is also the US asset manager that runs the world’s largest actively managed bond fund, has put its money where its bearish mouth is, and has eliminated its exposure to eurozone bank debt over fears these lenders are "excessively risky."

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"The Potential Problems Are As Follows" - How The Bull Market Could End According To Credit Suisse

With Trump now officially US president amid concerns that a "sell the inauguration" sentiment may emerge at any moment, it was an appropriate moment for Credit Suisse analyst Andrew Garthwaite to release his report listing the 10 possible ways in which the bank's central views (and often the consensus) could be surprised. Below the bank highlights the factors its thinks could surprise adversely in 2017, together with its core views.

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Where Are We In The Business Cycle: A Troubling Chart From Morgan Stanley

In its 2017 global strategy outlook note titled "Sparkle and Fade", Morgan Stanley is bittersweet about the future. While on one hand, the bank - which until recent had one of the gloomiest forecasts on Wall Street (a quick walk down Adam Parker's YTD memory lane should be sufficient) - is now recommending equities and urging the sale of Treasuries and other duration exposure, it also admits that the US is now well into the late stages of the cycle, financial conditions will tighten significantly, and that much more volatility is on the horizon: "by 2Q17, the market will confront a more hawkish Fed, a still-strengthening USD and a renewed moderation in China's growth. Political reality may also bite, as high expectations for action by the new US administration become hard to meet."

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