We are certainly living in strange times. An unprecedented monetary experiment is coming to a staggered end and no one knows the potential repercussions – a plague of frogs cannot be entirely ruled out. – Telegraph UK
Just like in 2008, no one knows where the next big derivatives accident daisy chain will start. Looking back, it would appear that the collapse of Bear Stearns trigged the chain of mortgage derivatives that took down Lehman and then AIG and Goldman. It was “fortuitous” (note the sarcasm) that former Goldman was CEO Henry Paulson happened to coincidentally be the U.S. Secretary of Treasury when Goldman blew up. It enabled he and Ben Bernanke to run around Capitol Hill in order to frighten and intimidate Congress into passing the $700 TARP package that was used to bail out Goldman and enable Wall St. to pay massive bonuses that year.
Fast-forward to today. We know that the globally, including here in the U.S. financial system, the notional amount of derivatives of is larger than it was in 2008 and considerably more risky. Interestingly, the Telegraph UK wrote an article that should be seen as an ominous warning: The world’s next credit crunch could make 2008 look like a hiccup.
We’re also beginning to see continuous warnings about the severe illiquidity of the bond market. I have been doing some research on this and it’s worse than anyone outside of Wall Street bond desks understands. Your pension fund that at least 50% bonds and illiquid “alternative” assets? LOL. Good luck. The Fed, along with every other major Central Bank in the world, has created a destructive monster in the world’s bond market that makes Frankenstein look like a small, plastic Ken doll…
The shale oil industry was scam by the big private equity funds who took a flier on the shale business because the bond market gave them access to dirt cheap capital thanks to the Fed’s ZIRP.
When the history books are written, the shale oil “boom” will be looked back upon as one of the bigger scams executed beautifully by Wall Street. Right now several oil shale development companies are in various stages of insolvency or headed toward insolvency. While the bond market in general has become relatively illiquid, the corporate junk bond market is now largely trading in “step function” prices for anything larger than “one-sies and two-sies” ($1 to $ 2 million bond trades).
Every junk bond fund under the sun is completely mismarked and overvalued because the “mark to market” pricing mechanism that has morphed into “mark to quote.” But I know from talking to contacts on Wall Street that anyone who wants a bid for something more the a very small size of bonds had better be prepared to accept a much lower price than where their position is marked. Conversely, don’t stick a bid on anything unless you really want to buy it.
Oil Bonds Lose Investors $7 Billion in 10 Days – Investors lured back into junk-rated energy bonds by their juicy yields are getting burned. Oil prices have fallen more than 15 percent since March 4 to a six-year low of $42.3, wiping out $7 billion of market value of high-yield debt issued by energy companies. (LINK).
If true mark to mark were imposed on the junk bond market, that $7 billion loss could easily turn into a $21 billion loss.
Anyone reading this who has investments in high yield bond funds should get out now. The next big event that triggers a big sell-off in the junk market will cut the value of a lot of these junk bond mutual funds down by one-third to a half. You can exploit the fraudulent bond price-marks in all of these funds by redeeming your investment ahead of the pack. Pigs are greedy and hogs get slaughtered. The yield-hog investors are on their way to the meat packing house…