Tag Archives: BlackRock

Second Warning: Get Out Of Your Bond Fund Before It’s Gated

The junk bond bubble has exploded.  Yesterday a public mutual fund “specializing” in the lowest-rated segment of junk bond market announced that it was suspending redemptions and liquidating its assets.  It’s debatable whether or not it will be able to sell the nuclear garbage in the fund unless the Fed prints up some money and buys it.

Today Stone Lion Capital Partners gated one of its hedge funds “specializing” in distressed debt (defaulted and near-default bonds and bank debt).  Interestingly, Stone Lion was founded by two former Bear Stearns employees after Bear Stearns choked to death on fraudulent mortgage paper.  Stone Lion disclosed that it had received redemption requests that were significantly in excess of its ability to sell enough holdings in the fund to meet the requests.

This brings up the issue of “mark to market.”  If the fund industry was marking its positions accurately based on where they could sell a meaningful amount of their holdings, this would not be a problem.  As I stated earlier this week, the entire high yield bond universe – including the pension funds who have a material exposure to the junk bond market – had been keeping their positions marked at unrealistically high levels and holding their breath in hopes that no one would have to sell and disprove the mark levels.

But “hope” is not a valid investment strategy.  I have personally lived through this nightmare, although on a tiny fraction of the scale that it is occurring now.

Blackrock (BLK) is the poster boy for credit market mutual funds.  Blackrock’s funds are riddled with illiquidity, derivatives and bad investments.   The stock is down over 11% in the last 10 trading days.   It plunged 6.5% today.

If you are invested in junk bond funds it may be too late.  I suspect that several other funds will lower the “gate” on redemptions starting this weekend.  You may as well write off most of your investment off in these funds.

But it is likely not too late to get out of any other fixed income funds.  I am advising anyone reading this  to get out of any investment grade corporate or mortgage bond funds.  The melt-down in the high yield market is going to spread quickly to the entire credit market. Foretold is forewarned.

Everyone is worried about what will happen if the Fed nudges the Fed funds rate up a microscopic amount next week.  But the planetary-system sized bubble that has inflated would never have been possible without the Fed’s monetary policies.  Get out while you still can because the window to slip through is closing quickly.

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Pension “Armageddon” Got Closer Today

The IMF fears underfunded pension funds could be encouraged to chase returns through riskier investments such as direct credit exposure or by engaging in securities lending in order to improve their funding ratios….The IMF’s comments echoed similar warnings from the OECD in May, when the Paris-based body said pension funds’ move towards riskier asset classes could result in their solvency position being “seriously compromised” in turbulent markets.  The Financial Times

Yesterday I published a post in which I outlined the reasons why pension fund underfunding is likely much worse than the level admitted by the funds themselves and industry professionals.  The biggest culprit is “mark to market” of illiquid investments into which pension managers have “shoe-horned” themselves in order to give the appearance of rates of return that are higher on paper than in reality.  A good friend and colleague of mine, who happens to be very bright, had this comment in response to my post:

Pension funds are collectively insolvent.  Basically the asset managers running these funds have refused to MTM them properly, expecting the assumed X% annual return to normalize.  Sorry, buddy: this IS the new normal (which is why the unfunded situation gets worse every year… assume 8% and get 0% for enough years and the chasm only widens… in fact, by the rule of 72, your funding gap will double every 9 years if that 8% gap is reality).  This is where the rubber hits the road, the issue which is going to punch the middle class in the gut like a steel 2×4.

This is the same dynamic that torpedoed the big bank balance sheets when the housing/subprime credit bubble popped, as big chunks of home equity, mortgage and other credit products were marked close to par when in reality most of it was worth zero. And this is one of the primary reasons that the Fed is devoting significant resources to keeping the stock market propped up:  pension fund insolvency is at risk.

One of the biggest areas of concern for pension funds is their private equity investments. Most pension funds have been literally “throwing” cash at private equity firms who have been shoveling money into real estate rental schemes and, even worse, have fueled the private market Silicon Valley bubble.

No one ever admits to a bubble until after it’s popped and has destroyed trillions in value – just ask Alan Greenspan and Ben Bernanke.   Bernanke never saw the housing bubble that he and Greenspan blew and Janet Yellen can’t see the tech bubble that she and Ben inflated. Fortunately for Ben,  Yellen will get tagged with the Silicon Valley collapse.

It looks like the process has begun.   Dropbox tried to IPO at its private market valuation of $10 billion and had to pull it, as the public market disagreed with BlackRock, who led the last round of funding for Dropbox.  Dropbox has revenues of a little more than $200 milion and zero net income.  The $10 billion valuation was insane.  But the game is over now.

As more Silicon Valley “unicorns” fail to monetize at levels even remotely close to their private market bubble value, the value of the private equity holdings of pension funds will vaporize.  The valuation process for a tech start-up is typically a “bi-nomial” function.  It either works and is a home run or it’s worth close to zero because the company’s technology will never generate income (Amazon?).

This implies that private equity holdings held by pension funds are significantly overvalued on the “mark to fantasy” basis and will eventually be subjected to massive valuation write-downs.  It’s a vicious negative feedback loop that is magnified by the “leverage effect” created by the existing level of pension fund underfunding.

Here’s what the problem looks like visually (source:  Zerohedge):

This graphic shows five of the steepest declines in stock price for tech companies IPO’s in the last Untitledfew years. Note that the steep decline occurs since 2014. This means that private equity funds with investments in comparable companies have mark down their private market holdings to reflect better the valuations given to these companies in the “cash out” market. This also means that pension fund private equity fund holdings are likely already significantly overvalued.

As for real estate?   One of the primary source of funds for the buy to rent portfolios amassed by private equity firms like Blackstone has been pension funds.  A recent merger of two public buy-to-rent REITS valued one of the entities’ current home rental portfolio at 50% of its original carrying (i.e. investment) value.   As with tech p/e investments, this transaction effectively revalues down significantly pension fund investments in this sector.

The bottom line is that pension funds are already significantly underfunded.  Recent developments in the real estate and tech investment private equity market suggest that the level of underfunding is about to be bludgeoned.

Systemic Leverage: BlackRock Calls For Pulling The Plug On Stocks To Prevent Big Drops

It doesn’t surprise me that BlackRock would propose pulling the plug on the NYSE and related derivatives markets in the event of a big drop in prices.   BlackRock is the firm who’s co-chairman has running around DC with sacks of cash lobbying to make sure that derivatives will bailed out by the taxpayer.

Why?  Because BlackRock is the biggest participant in this:

The IMF calculates that there is around $1.5 trillion in embedded leverage in U.S. bond funds through derivatives, which could unwind dramatically if the Fed’s normalization process provokes liquidity shocks.   IMF Derivatives Warning

I find it hysterically ironic that the fund management firm whose CEO Larry Fink argued with Carl Icahn that there’s plenty of liquidity in the system to absorb a hit to the credit markets is now proposing to “unplug” the exchanges if stocks drop – make no mistake, this proposal was in BlackRocks mind at all when the S&P 500 was moving parabolically higher:

The fund company is proposing a three-part cure: the whole $23 trillion market should NYSE circuit breakerautomatically come to a halt if a significant number of shares stop trading; venues should use the same triggers to suspend trading throughout the day; and rules on when to pause securities should apply equally to shares, listed options, futures and exchange-traded products.  – BlackRock Calls For Halting Stocks    Perhaps this should be BlackRocks new marketing campaign:   “WHEN IN DOUBT, PULL IT OUT”

BlackRock’s Warning: Get Your Money Out Of All Mutual Funds

BlackRock Inc. is seeking government clearance to set up an internal program in which mutual funds that get hit with client redemptions could temporarily borrow money from sister funds that are flush with cash.  – Bloomberg News

We may have been early on warning about leaving your savings in the financial system. It’s okay to be too early getting your money out of the system but it’s fatal to be just one second too late.  The gates are already in place in money market funds just waiting for the signal to be lowered

BlackRock’s filing with the SEC to enable “have cash” funds to lend to “heavy redemption” funds should send shivers down the spine of anyone with funds invested in any BlackRock fund.  In fact, it should horrify anyone invested in any mutual fund.

Larry Fink, BlackRock’s chief executive officer, said in December that U.S. bond funds face increased volatility, adding that he expected a “dysfunctional market” lasting days or even weeks within the next two years.   – Bloomberg

I warned last summer when the money market funds received authorization to put redemption gates in place that it was time to remove your money from these instruments.  The only reason a gate would be needed is if the people running the funds believed that there were risk events coming that would necessitate the gates.

BlackRock has already arranged credit lines from banks to cover the possibility of a redemption stampede from its riskier funds.  It’s clear the elitists running BlackRock now foresee events coming that will trigger a redemption run because the fund company is seeking SEC approval for the ability to take cash from funds with cash and lend that cash to funds that will need cash when the redemption rush begins.

Rather than let the market decide the value of the investments in BlackRock’s riskier funds, Larry Fink is going add even more leverage to the equation by enabling riskier funds to take on debt in order to avoid having to sell positions into a market that won’t be able to handle the selling.   This adds yet another layer of fraudulent intervention to a system that is ready to blow up from what’s already been done to it.

And let’s not forget, as I pointed out last summer, that BlackRock funds are already riddled with OTC derivatives, which is why Vice Chairman Barbara Novick has been running around Capitol Hill working to get a bailout mechanism in place for the Depository Trust Company’s derivatives clearing unit.

BlackRock Changes The Rules Of The Game Because Of An Outcome It Fears

This move will, in effect, transfer a portion of the risk of BlackRock’s riskier mutual funds – derivative-laced high yield and equity funds – to its more “conservative” funds, like high grade, short duration fixed income funds.

BlackRock

Anyone who invested in less-risky funds did so with an understanding of the definition and risk parameters of the funds at the time of investment.  But now BlackRock is changing the rules and risk parameters of those funds by exposing them to the counterparty risk of the riskier funds in the BlackRock fund complex which will be able to borrow money from the less risky funds.

This means that the Treasury fund in which your IRA or 401k is invested will now be “invested” in any fund that borrows money from the fund with your money.  The risk profile of your “conservative” fund assumes the risk profile of the riskier fund. Because of this, there is absolutely no reason for anyone to leave any of their money in any of BlackRock’s funds.

The SEC should deny BlackRock’s filing.  But it won’t because Wall Street is the SEC.

This move by BlackRock also signals that the elitists at BlackRock foresee an event that will disrupt the markets and trigger “bank” run on mutual funds.  What or when is anyone’s best guess.  But the fact that Larry Fink has decided to implement internal lending among funds indicates that he and his band of merry criminals believe an event will happen sooner rather than later.

To me, this is the signal that everyone should call up their mutual fund company, financial adviser or 401k administrator and get all of their the money out of any mutual fund.  Larry Fink has done everyone invested in any mutual fund a favor:  he’s unwittingly signaled that it’s time to get out – now.   Anyone who is aware of this and does not take action immediately is either a complete idiot or simply does not care about having their money taken from them by the criminal elite.

If Greece Blows Up And Financial Armegeddon Hits, Gold Will Go “Bid Without”

Although the Fat Lady isn’t on stage singing yet, it looks like my view that the Troika/Greece situation would resolve with a “NO-GREXIT” was wrong.  I’m actually relieved because perhaps this will be the catalyst that will trigger a forced re-setting of all markets globally which have been rendered catastrophically disconnected from any remote semblance of their representative underlying fundamentals.

At least at this moment in time, the Eurozone has rejected any bailout extension beyond June 30th, regardless of the outcome of the Referendum on the matter declared by Tsipras.   Perhaps this is the Troika’s most extreme effort to get Greece to “blink” in what has been, up to this point, a childish game of chicken.

However, that not being the case, it will be interesting to see how the markets will react on Monday, assuming the Central Planning Network of western Central Banks exercise ultimate control by cutting the “electricity in the casino” by making  sure all the markets “break” ahead of Monday’s open.

Per a report posted by Zerohedge, one Cyprus-based FX brokerage firm, Mayzus, has declared at FX instruments to be “Close Only” mode until Monday morning:  LINK.  It will be interesting to see, assuming no changes to the latest status of the GREXIT drama, if most, if not all markets, decide to declare a trading holiday on Monday.

Please understand that if the credit, derivatives and equity markets had not been inflated with printed liquidity to such an extreme degree, there would never be a need to “break” the markets to stop trading or declare an outright “holiday” as Mayzus has.

Why? Because the relative price level of the markets would have already incorporated a significant amount of the expected risk attached the probability of a GREXIT. Unfortunately the Central Banks have, up to now, successfully prevented healthy volatility and have completely insulated the markets from all measures of risk.

Thus, the only way to prevent financial Armageddon is to declare all markets on holiday. However, the most interest market to watch will be the re-pricing of the market for physical precious metals.  Even if they suspend the trading of fraudulent paper futures trading, an over-the-counter – or even “black” market – for physical bullion will develop.  This is because, unlike futures contracts, buyers and sellers can effectuate an exchange of physical for fiat paper.  Of course, I believe that this market would open up “bid without,” meaning buyers will stick bids out looking for offers.

There’s nothing more terrifying in the markets than trading a market that goes “bid without” when you are short.  Theoretically markets have a bottom – zero – but the upside is infinite.  Speaking from the experience of being a market maker in a relatively illiquid market – junk bonds – it is more than just an “uncomfortable” feeling when you are short and the market goes “bid without.”  It seems like an eternity until the first offer might appear and the pit in your stomach goes bottomless when an offer finally appears at a level much higher than the level for which you were praying.  The short position will cause heart attacks and Bill Murphy’s prediction that they will eventually carry gold shorts out of the Comex on stretchers will come to fruition.

The only advice I would give to someone who decides to throw an offering out in physical gold is this:  make sure you offer your gold at a price at which you are willing to own fiat paper currency instead of hard currency devoid of counterparty risk. Regard the value all fiat currencies like you might regard the value of new drachma relative to the value of physical gold bullion.

If You Don’t Like The Outcome Of The Game, Just Change The Rules

Perhaps this could be the “Force Majeure” event the Comex bullion banks are looking for in order to get out of their massive naked paper short position in silver by declaring that all contracts are to be settled “cash only.”  At that point, may as well just shutter the Comex because no one will want fiat cash.

Speaking of changing the rules, BlackRock is seeking Government clearance to “change the rules” governing their mutual funds in order to set up an internal program in which mutual funds that get hit with big redemptions can borrow cash from internal funds that have a lot of cash:   BlackRock Seeks To Change The Rules Of The Game

Not only does this tell us that the elitists running BlackRock expect a big run on mutual funds at some point soon, but it’s a signal to everyone to get their cash not only out of the rigged markets, but out of the financial system entirely.  

More on this later, but anyone reading this who owns BlackRock mutual funds of any variety is a complete idiot if they don’t call up their brokerage or financial advisor and demand immediate redemption.  That is, of course, if the markets open Monday….