Description

I am posting this here because I would like someone to disprove my idea / pushback on it.

Simply put the idea is as follows:

The federal reserve has done arguably the most herculean monetary stimulus in American history - they have said essentially that the fed is going to backstop all corporate credit, all muni credit, and to a large extent all SMB credit.

There must be some credit consequences to massively levering up during a downturn in earnings - the US government is doubling its debt, while earnigns are down 30+%, perhaps more - GDP will be down 30+% this quarter, and tax receipts who knows how bad those will be or if we even have a tax holiday this year

The old school credit methodology is you have your sovereign risk as it's the risk free asset in a given country, and then tack on a credit spread for a corporation, a municipality, or a pizza shop what have you.

Right now, the trade the fed is doing is buying all credit assets - so it seems quite likely that the spread between treasuries and corproates should massively collapse overall - essentially the fed has decided we're all in this together - so doesn't matter if you are a high yield casino, an IG health care company with a rock solid balance sheet, or Mama's Pizza & Pasta, we're all all for one and one for all.

At the same time, the federal deficit is going to double, while the "earnings" that support that leverage are down massively.

So I think the positive carry trade is to be long all credit assets and short US treasuries - this can be accomplished through many ways - a simple equity driven approach would be logn HYG, short TLT, but there are other smarter ways to put it on I'm sure

Catalyst

father time is undefeated