Tag Archives: Black Rock

Is The Fed Trying To Arrange A Bailout Of Junk Bond Funds?

Warning #3:   If you are hesitant to sell your bond funds, use any bounce in the junk bond market to get out of all fixed income funds.  Someone asked me the other day about Treasury funds.   Go read the fine print in the prospectus.  You can find it online.  If the fund permits the use of derivatives, get out of it.  100’s of thousands of investment advisors and retail investors loaded up on Pimco’s Total Rate of Return fund having no idea that it is riddled with derivatives.   If you own Black Rock funds, don’t wait for a bounce.  Just get out.  Black Rock is the financial market version of Fukushima.

I heard a rumor today that the Fed is trying to solicit “fire sale” liquidity bids from private equity funds for big chunks of the bonds held by high yield mutual funds and ETFs.  I want to emphasize that this is an unsubstantiated rumor but it comes from a good source.

At this stage in the game, I believe the Fed will do anything possible to keep the system from collapsing.  On the assumption that the rumor is valid – which I would suggest has a 95% level of probability – I would also expect to see the Fed, in conjunction with the Treasury, offer private equity firms zero-percent credit lines in order incentivize and facilitate an attempted bailout of the junk market by private equity funds.  After all, this would be a no-risk opportunity for the managers of these funds to throw their growing cash piles at something besides Silicon Valley unicorns in order to put the cash to work and skim fees off the invested capital.

Of course at the end of the day, if this scenario plays out, it will be just another attempt to kick the proverbial can down the road and forestall the inevitable collapse of the financial system.  Unfortunately the fundamentals which support the idea that there’s any intrinsic value in the majority of the junk paper that has been issued over the past five years continue to deteriorate.

The primary reason for the Fed to prop up the junk bond market is to prevent the stock market fromUntitled collapsing.  The graph on the right shows what’s at stake (click to enlarge).   At some point the performance of the S&P 500 and the high yield bond market will be forced by the market to re-correlate.  I highly doubt that high yield bonds will converge up to the stock market.

The graph below on the left shows that leveraged loans, which sit on top of junk bonds in the capital structure, are chasing junk bonds in a race to the bottom now.  Theoretically, to the extent the the top of the Untitled1capital structure – leveraged loans – are valued at less than 100 cents on the dollar, everything below them is worth zero.  In a strict application of bankruptcy law, liquidation payouts go from top to bottom.  However, for practical purposes, bankruptcy workouts typically sprinkle some of the agreed restructuring value to the debt tranches below the senior secured level.  If for nothing else than to prevent lawyers from cannibalizing any remaining value with fees.

As you can probably guess, if senior secured debt and junk bonds are worth substantially below par, the equity is worth zero.   THAT is why the stock market eventually follows the junk bond market lower.  THAT is the dynamic that the Fed will attempt to prevent using any possible means at its disposal – legal and illegal.

History tells us this will eventually fail.   The degree to which the end result is catastrophic is always directly proportional to the amount of effort that went in to the attempt to prevent the inevitable.

You can make money off of this inevitability by shorting the stock market.  As this unfolds, there is a lot of money to be made shorting all of the hideously overvalued stocks.   My new subscription service will be rolling out two ideas per week that will help you find ways to exploit the gross price distortions and sector bubbles that have developed after 6 years of extremely reckless monetary policy by the Federal Reserve and U.S. Treasury.    You can subscribe by clicking here:   SHORT SELLER’S JOURNAL.

SoT Market Update: Wall Street Wants To Trap Your Money

SEC Chairman, Mary Jo White, is not on your side.  If she had any sort of backbone and wanted to protect the public from Wall Street’s den of thieves, there would be people going to jail right.  She does not have your best interests at heart.  BlackRock?  They just want all your money.   – Rory Hall, Shadow of Truth

Consider yourself warned.  In fact, the first warning from the elitists was fired in January 2010, when the SEC voted almost unanimously to allow Money Market Funds to suspend investor redemptions during periods of “extraordinary circumstances.”  Of course, it’s during those periods of time – when the financial system is melting down – that investors would want to get their money out of money market funds.

As of September 10, a total of $2.66 trillion was held in money market funds.  I would surmise that 98% of the investors in these funds have no idea that their money will be “frozen” the next time financial panic hits this country.  Undoubtedly their “trusty” financial adviser never disclosed the existence of “redemption gates” on money market funds.   Returns are so skinny on these funds there’s really no reason to leave your money in them.  The eventual cost of the convenience these funds offer will be the amount of your investment.

It was only a matter of time before the trend in redemption gating the fund industry moved to mutual funds.  While the latest proposal being considered by the SEC is not a hardcore redemption gate, the agency is looking into allowing mutual funds to impose a surcharge on investors who want to get their money of these cesspools during times when the market is dropping quickly.

The current proposal would allow mutual funds to charge extra fees to investors who leave the fund when the market is taking a dump.  The rationalization being that there’s extra “trading costs” involved in selling securities when the market is “volatile.”  This is highly misleading because “trading costs” are accounted as operating costs, which are costs incurred ratably by all investors in the fund.

It’s interesting that these “extra costs” didn’t seem to occur in 1987 when the stock market dropped in 22% in one day.  Or in  March 2000, when the Nasdaq fell 93% over the next 29 months.  Or in October 2007, when the S&P 500 fell over 50% over the next 17 months. These were all periods of “high volatility” and fund investors were fleeing en masse.

And, of course, there didn’t seem to be any “extra trading costs” involved when the market volatility was heavily skewed toward the upside starting in April 2009 and the masses were rushing back into these funds.

Make no mistake about it, this is the next step closer toward enabling the mutual fund industry to impose redemption gates on all mutual funds.  After all, what better way to help the Fed prop up a collapsing stock market – which will be collapsing for valid fundamental reasons – than to prevent investors from taking their money out.

Wall Street, with the Government’s full backing, has two goals in mind:  1)  seduce the retail public into putting all their money in mutual funds, especially funds loaded with hidden risks and derivatives;   2) figuring out how to force them to keep it there.   Be clear about one thing, the entire Governmental system is moving toward totalitarianism.  One of the cornerstones of a totalitarian system is capital controls.

Rory and I discuss the latest scheme by Wall Street to trap your money in this Shadow of Truth Market Update:

Consider yourself warned…

Repeat: Get Your Money Out Of Bond Funds – NOW

This article was in Bloomberg News today:

There’s a bigger risk “that when the the Fed starts hiking in earnest, outflows from high-yielding and less-liquid debt will lead to a free fall in prices,” JPMorgan strategists led by Jan Loeys wrote in a June 20 report. “In extremis, this could force a closing of the primary market and have serious economic impact.”

Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise

It’s just like I said (video link), BlackRock is leading the charge, there’s a massive derivatives blow-up coming at some point and there will be capital controls placed on bond funds.

Don’t say you have not been warned.   And move your money in to physical gold and silver.