Is This the Canary in the Economic Coalmine?

I don't normally tell people to read my stuff but, in this case, it's important. Particularly if you have even a penny invested in stocks, bonds or ETFs (electronically traded funds). Whether as stand-alone investments outside of a 401k or Keogh or, particularly, if you are invested in a pre-tax payroll investment account such as a 401k. If you think what I say here is interesting, share it with others you know because this could be the canary in the coalmine for another financial / economic meltdown.

Late last week both Stone Lion Capital Partners and Third Avenue "gated" junk bond funds. That means that if you had money invested in junk bond funds at either of these firms, or with any others that have been 'gated', you cannot redeem your holdings. The fund is closed with your money inside - the gate has come down separating investors from their investments and there is no recourse. That money is, for all intents and purposes, gone. News of these funds is all over the place in the news - I've posted just three links, and here's an excerpt from the CNN report (link below): 

"Opportunity in the junk bond crisis: Junk bond ETFs get hit hard in the wake of Third Avenue Management's decision to liquidate its junk bond fund and activist investor Carl Icahn weighed in on this move. Greg Peters from Prudential joins to discuss.

 

Hedge fund Stone Lion suspended redemptions in its oldest fund Friday, the latest pain in the high-yield debt market, The Wall Street Journal reported.

"The firm said its $400 million portfolio fund received "substantial redemption requests," according to the paper. Stone Lion says it manages around $1.3 billion, and focuses on distressed debt. Stone Lion's move follows steps taken by Third Avenue Management, which on Thursday said it would stop withdrawals from a high-yield bond fund that it is attempting to liquidate. The value of many distressed and risky investments has plummeted recently."

http://money.cnn.com/2015/12/11/investing/junk-bond-fund-blows-up-third-avenue/

http://www.marketwatch.com/story/now-stone-lion-capital-suspends-redemptions-as-junk-bond-market-fears-accelerate-2015-12-11

http://investmentresearchdynamics.com/second-warning-get-out-of-your-bond-fund-before-its-gated/

As I do to make sure that what I present here is accurate, I went out to the larger web and Googled "Junk Bond Market News". That resulted in a list of pretty scary headlines if you own mutual funds - most of which also include investments in bond funds because bond funds are generally seen as being "safer" and less volatile than stock holdings.

Because of the attractiveness of return on investment of junk bonds, a lot of brokers buy some to add to their mix of more stable offerings. If a lousy bond or stock priced at $1.50 or $2.00 per share jumps 50 basis points, that's a significant ROI.

http://www.wsj.com/articles/junk-bond-selloff-intensifies-after-funds-demise-1449857705

The opening paragraph in the article linked above says:

"U.S. junk bonds posted their steepest decline since 2011, intensifying fears that a six-year bull market in stocks and other risky assets is nearing an end."

Based on these articles, and other articles I found, the junk bond market - those investments that are the riskiest of the risky - is unraveling. If this follows past patterns - like the financial crisis of 2007-2008 which led to the "deepest recession since the Great Depression" - we are gonna be in a world of economic hurt sometime next year or in 2017.

Googling "junk bond 2007" brings up this, among other articles:

http://www.investopedia.com/ask/answers/041515/what-role-did-junk-bonds-play-financial-crisis-200708.asp

More worrying is this article from MarketWatch from last Friday:

http://www.marketwatch.com/story/high-yield-debt-meltdown-is-so-similar-to-2007-gundlach-says-2015-12-11

So, what does it all mean? It may well mean that the house of cards we've been seeing in the financial markets - the Dow Jones Index, the S&P 500, etc. - is starting a harmonic breakdown as Gundlach says in this article:

"“People are too long credit and the credit is melting down and the stock market is whistling through the graveyard. It is so similar to 2007, it’s scary,” said Gundlach, who oversees $80 billion at the Los Angeles-based DoubleLine Capital."

But what about the NYSE, the Dow Jones? The stock market is up above 17,000 points!

Back in 1987, on Black Monday, world financial markets "crashed", losing twenty percent of their value. This was in the days before the automatic trading stops. In fact, this was the root cause for the development of the automatic trading stops. Now, if a single stock or the entire market drops a certain percentage, trading is halted in that stock or in that market. In 1987 it took months to recover from that drop. You can see from this chart (yes, I know charts aren't fun or sexy, but they are telling) that a recovery hadn't even begun three months later:

Attribution: "Black Monday Dow Jones" by Autopilot - Own work by uploader; DJIA values from http://www.cs.princeton.edu/introcs/data/DJIA.csv. Licensed under CC BY-SA 3.0 via Commons - https://commons.wikimedia.org/wiki/File:Black_Monday_Dow_Jones.svg#/media/File:Black_Monday_Dow_Jones.svg

https://en.wikipedia.org/wiki/Black_Monday_%281987%29

Today, this drop would have been reversed in a matter of just a couple of days, at most, because of U.S. Federal Reserve intervention - POMO - but I'll get to that in a minute.

Starting last week, ahead of the Federal Reserve's meeting next week to pronounce whether interest rates are going up, going to negative or staying where they are, people started moving their money:

Equity funds saw $6.4 billion in outflows over the past week while market participants pulled $6.1 billion from fixed income, according to BofAML. Yield plays suffered in particular, with high-yield funds losing $3.8 billion — the most in 15 weeks, while bank loans and master limited partnerships also sustained losses.

http://www.cnbc.com/2015/12/11/investors-flock-to-cash-ahead-of-fed-meeting.html  

And those high-yield funds mentioned there are the junk bond funds - like Stone Lion and Third Avenue.

So with equity funds - stocks - seeing a $6.4 billion outflow last week, the markets are starting to roll over - and, according to the guys I've been reading, it's only going to get worse.

Following the 2007-2008 financial meltdown, the U.S. Federal Reserve, Congress and the Treasury department instituted "fail safes" to protect the Too Big To Fail Banks. Remember those financial institutions the US taxpayer bailed out? Yeah - those guys. At the G20 a couple of years ago everyone in attendance all signed off on "Bail-Ins" in case the banking and investment industry goes back down the 2007-2008 road.

A bail-in is simply a nice way of saying "stealing". In a bail-in, the banks, by law, can take money from investor's accounts in order to keep their operation going. It was done in Cypress a few years back, and it's been signed off on by the Central Banks (including the Federal Reserve in the US) around the world.

The US Federal Reserve in collusion with the US Treasury Department also instituted Permanent Open Market Operations (POMO) which is convoluted talk for monetary intervention in the financial markets if things look shaky. Here's the definition of POMO:

DEFINITION of 'Permanent Open Market Operations - POMO' When the Federal Reserve buys or sells securities outright in order to permanently add or drain the reserves available to the U.S. banking system.

So what's the problem? Well - it leads to a false idea about the economic health of America. We are being spoon-fed a bright and glowing picture that is based on false data.

If the securities markets - stocks, bonds, banks, anything monetary - shows a less than rosy picture, the Federal Reserve does an asset swap to shore it up and make it look less sickly. The following excerpt is from a 2010 article (emphasis added in places with bold text), and the Fed's continued interjections into the financial marketplace have accelerated since then, inflating the DJIA far higher than it would be were the numbers real.

"For the period of POMO’s from 2005-2007 there were 50 operations and the market advanced a grand total of +0.35% on these days.  Since the market collapse, however, there have been 155 operations and the market has advanced a total of +26.95% on these days. So, the outsized returns could merely be a function of coinciding with one of the greatest bull markets in history.

"What’s so interesting about all of this is the real world impact, however.  These operations don’t alter net private sector financial assets.  Therefore, it’s really just asset shuffling.  The Fed is not printing new money when it conducts these operations.  They’re simply asset swaps.  They don’t add to the private sector’s income, they don’t create jobs, they don’t make the economy better off (aside from a highly debatable and marginal interest rate effect).  There is, however, an obvious argument that there is a high correlation between market response and POMOs.  So while there is no reason to believe that these operations actually make us all better off there is considerable evidence supporting the idea that these operations correlate with periods of assets being “higher than they otherwise would be” – in other words, assets tend to be disconnected from their fundamentals during these Fed operations.

"I’ll be honest with the reader.  When I ran this data I was really hoping that I would find evidence showing that the POMOs have no impact on market direction.  The conclusion is unsettling for obvious reasons.  And while this might be nothing more than a case of datamining, the evidence is convincing that the Federal Reserve is helping to boost equity prices without creating an equally positive change in SUSTAINABLE economic growth.  I’m not a conspiracy theorist, but when I’ve got the Manager of the System Open Market Account for the Federal Open Market Committee telling me that he wants to keep “prices higher than they otherwise would be” combined with this evidence it makes it very hard to believe that the Fed isn’t attempting to outdo Bernie Madoff."

http://www.businessinsider.com/a-case-study-does-the-feds-permanent-open-market-operations-actually-lift-stock-prices-2010-10

In other words, ladies and gentlemen, the US government, in collusion with the US Federal Reserve, is running a Ponzi scheme and this Ponzi scheme, if the shakiness starting in the bond market is anything to go by as it was pre-2008 economic collapse, is about to come down.

If this 'gating' of junk bonds is the dying canary in the goldmine and if the equity markets do collapse, we will be in for a really wild ride. There will more than likely be another financial collapse. Unemployment will resurge to something much higher than the purported (and purely BS) 5.1% being touted by our government*. Welcome to the Third World, America!

http://www.cnbc.com/2015/10/02/chart-whats-the-real-unemployment-rate.html

So, call your broker and put at least some of whatever holdings you have into the safest thing you can find. Money market is marginally safe, liquidation is safer because our financial institutions have the option of bailing-in the monies they have on their books if they get too tightly squeezed. Then hold onto your hat because I'll wager that no matter what happens, those paper assets are gonna take a ginormous hit, and there's nothing you can do about it.

Good luck!

Philippa

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Greece, Rehypothecation and Slavery

Rehypothecation – do you know what that is? It’s a really great big word that means stealing. Slavery is a hot button word that is alive and well in societies around the world.

The stealing part is what’s happening in Greece right now. It’s what happened in Cyprus two years ago. Puerto Rico is on the verge of bankruptcy, unable to meet its obligations on $70bn of debt. Spain has a weak economy and might be next. Will they follow the examples set by members of the European Union?

As an individual, when you put your money – the dough you earned by working and earning a living – into a bank or mutual fund or other ‘paper’ investment, that money is no longer yours. It is theirs. The place into which you put it takes it. It does not go into a little box with your name on it. It gets pooled with everyone else’s, and then it gets loaned out. On one dollar deposited, they can borrow ten.

Now, if that person or entity to which the loan is made defaults, if they don’t pay their debt, there’s usually an asset of some type. A home loan is made against the physical structure. If the borrower defaults, the bank takes the house. It can resell that house and collect at least some of the money it loaned against it.

In the case of a loan to a nation – like Cyprus or Greece – there is no single physical asset that stands as collateral. Because of that, the loans made to countries with weak economies are bad investments.

Because the European Union, European Central Bank (ECB) and International Monetary Fund (IMF) made loans to economies that were teetering on the edge of default and bankruptcy, the lenders – the other members of the European Union – are in a fix right now. There is nothing they can sell to get back their money – your money, since you’re the one who put the money into the bank in the first place.

Greece, with 26% unemployment and 30% of its citizens retired has more people unemployed or retired than working. More of their working citizens work for the government than for private business. Their debt to GDP ratio is astronomical – they are spending far more than they are earning. It’s like you, earning minimum wage and spending like George Soros.

As a result of its profligate spending (17.5% of GDP) on social benefits – pensions and such - it is in no position to repay the billions of Euros loaned to them in the past few years.

This leaves the ECB, IMF and the Greek government with limited choices.

They can do a public bail-in, like Cyprus did in 2013-2014. That was a very popular move. Take the money from depositors – steal it – so you can shore up a failing institution. Now, out of the kindness of their good little hearts, the bankers didn’t steal the money of the mom and pop depositors. They focused on the big kids – depositors with more than 100,000 Euros – with ample warning beforehand so those big depositors had time to shift the bulk of their wealth off-shore.

Right now, this week, Greece is quietly doing this – without the forewarning Cyprus offered. After all, the wealthy investors from Russia and other European countries probably didn’t make the same mistake twice. Instead of depositing in ‘iffy’ places like the Med, they’ve probably already shifted their deposits to more stable places – like Switzerland, the Bahamas and the Cayman Islands.

In the meantime, hurting those mom and pop depositors the most, banks in Greece are closed this week. The Greek stock market is closed, at least through Tuesday. Depositors who have their savings in the bank, if they wait long enough through the queue and if the reserve isn’t drained by the time they get to the front of the line, may (with the government’s permission), withdraw a whopping 60 EU per day - the equivalent of $66. No checks will be honored. In other words, the money that people have in their bank accounts is no longer theirs. It belongs to the bank and to the ECB and IMF.

Why is it like this? It’s simple. It is because the socialist model doesn’t work. They, the noblesse oblige governments, have run out of other people’s money.

They ran out of their own, from their own citizens, several years ago. Then they turned to the primary members of the EU and held out their hand, ‘help us, please’. The EU obliged by handing over billions of their citizen’s money to failing economies.

Socialism has never worked. Not once. It’s a wonderful ideal – if you’re lazy and don’t want to work hard to earn your keep. Take what others make – the ‘from each according to their ability’ theft of another’s labor.

Socialism is, in its most fundamental definition, slavery.

Stop and study that Marxist ideal: From each according to his ability, to each according to his need.

In other words, simple words, take from those who are able and give it to someone else.

When you have a society that hands out more than it takes in – the second half of the Marx ideal of ‘from each according to their ability, to each according to their need’ – you have a failing system. It is not sustainable.

At a ratio of 2:1 non-workers to workers, it becomes a slave state. Look at Greece.

The one worker is toiling to support two people. Never mind that the worker wants to enjoy the fruits of their labor, too. They do not willingly get up in the morning and go to work so they can be slaves who support the non-workers. At that point, they are slaves; nothing more, nothing less because their effort is given away to support someone else. They are not a free individual, using the gifts given to them by Fate or God or whatever. They Are A Slave.

That’s where Greece is now. The workers are working harder and harder to pay the taxes and the fees and the levies that provide the pension funds to the non-workers.

It didn’t work in the Soviet Union – the Soviet Socialist Republic that died in the 1980’s – a mere 70 years after starting. It isn’t working in Greece now. The only question remaining is how long it will take to collapse and who will be next.