Month: August 2018

When it comes to the battle between robots and humans for control of the market, the robots are winning so much, they’re getting sick and tired of winning.

According to the latest data from Bank of America, in the first half of 2018, there was a continued increase in the share of passively managed funds/ETFs. Between year-end 2017 and June 30, 2018, the passive share continued to grow, hitting 44.2% from 43.6% for US equities… 

… to 24.4% from 23.5% for US fixed income…

…  to 29.7% from 29.4% for high grade…

… and to 13.6% from 13.5% for high yield.

Extrapolating the current growth rate, passive funds will have a majority stake of the market as soon as 3-4 years from now.

And while traditional passive funds will be the big winners even as carbon-based human investors are relegated to the “2 and 20” (or more realistically 1 and 10 if not lower) scrap heap, one company will be the biggest winner.

BlackRock, the world’s largest money manager, may never have grown as far and as fast as it did without the unprecedented changes brought about by the recession. The business now towers over its competitors; its $6.3 trillion in assets under management exceeds the size of Germany’s economy.

And, as a detailed Bloomberg article profiling Blackrock’s history notes, the story of how BlackRock reached its current position is also the story of the financial industry over the past 10 years. The rise of exchange-traded and index funds and low-fee investing; lower risk tolerance on consumers’ part and higher anxiety within institutions; the government’s scramble to understand this crash and prevent future ones—all of these played to BlackRock’s benefit.

Readers may recall that in the immediate aftermath of the financial crisis, Barclays, which had just acquired the bankrupt Lehman estate, was looking to boost its capital reserves after rejecting U.K. government bailout money. The bank put up one of its crown jewels for sale: the iShares ETF unit, part of the fast-growing, San Francisco-based fund management subsidiary Barclays Global Investors Ltd. (BGI).

And when iShares came up for sale, BlackRock seized the opportunity in a big way, sweeping in with a $13.5 billion cash and stock offer—not just for the ETF unit, but for all of BGI.

“They were in a position to play offense while everyone else was scrambling,” says Kyle Sanders, an analyst at Edward Jones & Co.

The 2009 deal doubled BlackRock’s assets under management overnight, and has proven to be one of the best investments in recent history: riding a wave of investment in passive products, iShares had $1.8 trillion in assets as of the end of June. That – according to Bloomberg – gives BlackRock a commanding lead on its closest competitors, Vanguard and State Street, which had about $936 billion and $639 billion in ETF assets, respectively. Some more details from Bloomberg:

IShares accounted for 28% of BlackRock’s assets under management at the end of 2017, according to the company’s yearend report. Plenty of growth potential remains: ETFs are still nascent outside the U.S. The company predicts the global market for the funds will more than double by the end of 2023, to $12 trillion, driven by continued downward pressure on financial advisory fees and investors’ rising willingness to use bond ETFs for easy exposure to fixed-income markets.

There are other aspects to Blackrock’s post-crisis success, including its financial risk software, known as Aladdin (called an “X-ray machine for financial portfolios by the company’s COO), and which currently watches over $18 trillion in assets; then there is Blackrock’s close relationship with the NY Fed, which turned to BlackRock to manage Bear Stearns’ portfolio of toxic assets (in one 18-month period from 2011 to 2012, he was in contact with Fink more than any other corporate executive, according to a Financial Times analysis of his publicly available diary.), not to mention CEO Larry Fink’s increasing political prominence and clout when it comes to policy issues: when Fink wrote CEOs a letter earlier this year warning that they should be able to explain how their companies contribute to society, it made international headlines.

In any case, BlackRock’s success over the past decade might be easy to overlook, especially as it’s competing with government-reconstituted giants like JPMorgan, while private equity firms have vastly increased the scope of their investments in the last decade—particularly Blackstone which was spun out of BlackRock—and tech companies such as Google and Amazon.com Inc. have begun flirting with asset management.

Yet as Bloomberg notes, despite the fierce competition, BlackRock’s growth is among the starkest examples of how a financial company can build itself into an empire, even as the system is upended.

And there is one thing that has been more instrumental to BlackRock’s success more than anything else: the company’s early bet that computers and other “passive investors” would eventually price humans out of the asset management market. So far, with no recession ten years later, the longest bull market in history, and nothing but smooth sailing for the robots, the victory of the ETFs has made Fink and Company one of the biggest winners on Wall Street in the past decade.

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Authored by Thorstein Polleit via The Mises Institute,

The message unanimously churned out by politicians, central bankers, and ‘mainstream’ economists is that central banks are there for the ‘greater good’. They provide the economy with sufficient money and credit, and they fight inflation, thereby supporting output and employment growth. What is more, central banks, are supposedly in a position to effectively fend off or at least mitigate financial and economic crises. However, unfortunately, nothing could be further from the truth.

Throughout history, central banks have been created, first and foremost, to fill governments’ coffers. To increase the king’s or elected government’s financial means through an inflationary scheme – usually too elaborate and too treacherous for most people to see through. Central banks are instrumental for putting the ruler — or the ruling class — into a position where they can plunder the people on a grand scale and, by way of redistributing the loot, making a growing number of people financially and socially dependent on it.

To that end, central banks have been assigned the monopoly of money production. This has made it possible to replace commodities, or “natural money” with unbacked paper or fiat money. Central banks provide commercial banks with fiat central bank money, and commercial banks are free to pyramid a multiple of fiat commercial bank money on top of it. This is what monetary experts typically call a “fractional reserve banking system,” which is a genuinely inflationary scheme.

Murray N. Rothbard even speaks of a cartel between the central bank and commercial banks. In practice, the central bank acts as a cartelizing agent: “to cartelize the private commercial banks, and to help them inflate money and credit together, pumping in reserves to the banks, and bailing them out if they get into trouble.”  The fiat money cartel, formed between the central bank and commercial banks, has far-reaching economic and social-political consequences.

For instance, fiat money is inflationary in the sense that it loses its purchasing power over time; it cannot, and does not, serve as a much-needed store of value for savers. Also, the issue of fiat money sets into motion an artificial upswing (boom), which, however, must sooner or later flip to a downswing (bust). What is more, fiat money makes consumers, firms, and governments run into ever higher amounts of debt, pushing them towards a situation of over-indebtedness.

There is an additional severe problem with central banks’ fiat money: It affects income and wealth distribution, and it does so in a non-merit-based, anti-free market way. To understand this, we have to consider that if and when the quantity of money increases in an economy, the prices of different goods will be affected at different points in time and to a different degree. In other words: A rise in the quantity of money changes – and necessarily so – peoples’ relative income and wealth position.

The early receivers of the new money will be the beneficiaries, for they can purchase goods at still unchanged prices with their fresh money. As the new money is passed from hand to hand, prices are rising. The late receivers are put at a disadvantage: They can purchase only goods at elevated prices with their new money. In other words: The early receivers of the new money get rich(er), the late receivers get poor(er). Needless to say, those who do not receive any of the new money will be worst off.

In the crisis 2008/2009, for instance, it was the banking and finance industry (“Wall Street”) that was bailed out in the first place. Central banks printed up new money balances, injected them into banks’ balance sheets and offered them generously with extremely low refinancing costs. In the US, for instance, the balance sheet of the banking cartel is now way bigger than it was before the outbreak of the crisis. The banking cartel has weathered the crisis pretty well it has helped to bring about by issuing fiat money in the first place.

It is misleading to think a rise in the quantity of money would be “neutral” in the sense that it would leave peoples’ income and wealth position unchanged. In today’s fiat money regime, the relentless increase in the fiat money supply provided by the banking cartel does not only drive up consumer goods prices. It also pushes up asset prices such as stock, real estate, and housing prices. The holders of assets whose value goes up due to inflation benefit, those holding money balances lose out: The latter’s purchasing power is diminished.

It is difficult to pin down exactly who is a net-winner, and who is a net-loser of the banking cartel’s inflationary scheme. As a rule, however, fiat money holders bear the brunt – especially if central banks push interest rates to negative levels in inflation-adjusted terms; the income of wage earners falls behind the income of those owning assets whose prices inflate. Those getting bank credit are among the first receivers of the newly created money and thus benefit while those who don’t get bank credit are on the losing end.

Those taking side with the “deep state”, which is financed by vast amounts of credit provided by the banking cartel on favorable terms, enjoy secure employment and comfortable pension packages. Firms get profitable business from government orders. In particular, the commercial and investment banking industry, with its privileged access to central bank credit pockets enormous profits and pays downright obscene staff compensations.

It would be a mistake to argue that the banking cartel’s fiat money scheme works for the greater good. It benefits some — typically the few — at the expense of others — typically the many. So it does not come as a surprise that a growing number of people have raised the question: Does the banking cartel make inequality worse? Of course, inequality of income and wealth has many reasons, and as long as people are unequal in terms of inventiveness, industriousness, talent, and perseverance, income and wealth will be unequally distributed.

However, sound economic reasoning reveals that the banking cartel contributes to income and wealth inequality, even to a growing gap between the net-winners and net-losers of the fiat money scheme. This kind of inequality cannot be convincingly justified by economic or ethical considerations — for it is the direct outcome of the state monopolizing the production of money, and special interest groups taking advantage of the state’s money production monopoly to serve their purpose(s).

Public resistance against the wheelings and dealings of the banking cartel has been held in check so far, presumably because people have been enjoying a rise in real incomes over the past decades. What they do not see is the counterfactual: The banking cartel has kept most peoples’ income and wealth below potential; they could be better off, but the banking cartel has been preventing it. This statement opens the door for a counter-argument: Without the banking cartel and its fiat money scheme, there would have been no economic growth at all .

This, however, represents one of the perhaps most noteworthy errors in ‘mainstream’ monetary theory. To explain, money — the ultimate means of payment — is useful only for its exchange value. A rise in its quantity does not confer any social benefit; the economy is not better off if the quantity of money increases. As pointed out earlier, an increase of the money supply only benefits some at the expense of others. It is a means to slyly strip the uninformed of their resources, shovelling them into the coffers of the informed.

One question remains: Does a rise in the quantity of money not induce additional economic activity? This question implies a proposition that has no basis in sound economic theory. It is a seductive promise at best. For it can be logically argued that there is, and can be, no constant relation between external factors (such as a change in the quantity of money) and human action (such as, for instance, inventing, investing, or producing); the hypothesis “increasing the quantity of money induces growth” is thus logically unsustainable.

So, unfortunately, this article ends with a bitter insight: Sound economic reasoning will come to the conclusion that the fiat money scheme – represented and upheld by the banking cartel – contributes, and necessarily so, to income and wealth inequality within society. It is one source of widening the gap between the rich and the poor. By all standards, fiat money must be considered socially unjust. The same applies to the collusion between central banks and private banks.

So what is to be done? The solution is straightforward: Establish a free market in money, shut down central banks, dismantle the banking cartel. As Murray Rothbard says: “[A]bolish the Federal Reserve System, and return to the gold standard, to a monetary system where a market-produced metal, such as gold, serves as the standard money, and not paper tickets printed by the Federal Reserve.” Perhaps the debate about growing inequality helps to rehabilitate our money system — something economic insights have failed to achieve so far.

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Russia says that its diplomats in Washington formally reached out to US officials and have briefed them on an impending plan by al-Qaeda insurgents in Idlib to stage a false flag chemical attack in order to provoke a Western military attack on Damascus. 

This week Moscow has claimed to be in possession of firm intelligence that it says shows armed groups in Idlib are transporting chemicals to area sites, in preparation for the coming major Syrian Army and Russian offensive on the contested province in northwest Syria. 

According to RT News, it appears that the State Department previously confirmed that the rare meeting did take place:

Anatoly Antonov, the Russian ambassador in Washington, confirmed to the media on Wednesday that he had met with the US special representative to Syria, James Jeffrey, and David M. Satterfield, acting assistant secretary of state for near eastern affairs.

The attendees of the rare meeting and the fact that it had taken place earlier this week was revealed by US State Department spokesperson Heather Nauert during a daily briefing.

The meeting was reportedly held this past Monday, according to Russian Ambassador Antonov, who told RT it was “constructive and professional”. 

We noted previously that Pentagon and US officials have continued pushing the gambit on Syria, with multiple statements last week and this week which appear to be setting the stage to play the “Assad is gassing his own people” card should so much as an inkling of an allegation emerge.

With the dominant al-Qaeda group in control of Idlib, Hay’at Tahrir al-Sham (HTS), facing imminent defeat in what is likely to be a lengthy, grinding final showdown, they have every incentive to claim Syrian government forces are using sarin or another internationally banned substance. 

Considering allegations have been hurled at Assad and the Syrian Army before the Idlib assault has even begun, the past week’s war of words signals an unprecedented level of telegraphing intentions for leverage on the battlefield. 

Starting last week with John Bolton’s promise that the US “will respond very strongly,” American officials’ threats have gotten progressively more specific, with the State Department spokesperson this week saying “we will respond to any verified chemical weapons use in Idlib or elsewhere in Syria … in a swift and appropriate manner” while also vowing to “hold Assad responsible”.

But it appears Monday’s meeting constitutes a back-channel attempt to calm the fast intensifying situation. 

RT News continues:

At the meeting, Russia officially conveyed its concerns over reports that Washington together with France and the UK is gearing up for another set of airstrikes in Syria under the pretext of a chemical attack, that would immediately be blamed on the Syrian government. Moscow has asked Washington to “provide the facts without delay”to substantiate the new allegations that Damascus uses chemical weapons against its own people.

Russia’s ambassador to the US also reportedly identified the White Helmets as among the actors on the ground assisting in organizing such a potential provocation. 

Concerning the specifics of what was shared with the State Department officials at the meeting, RT reports:

Intelligence that Russia has gathered has been shared with the US, and the diplomats were told “in detail” about the provocation against civilians being prepared by Al-Nusra Front (now known as Tahrir al-Sham) in the northwestern province of Idlib.

The Russian Defense Ministry reported earlier that Tahrir al-Sham was plotting a chemical attack that would then be misrepresented as another “atrocity” by the “Syrian regime.” Eight canisters of chlorine have been delivered to a village near Jisr al-Shughur city, and a specially trained group of militants, prepped by the British security company Olive, also arrived in the area to imitate a rescue operation to save the civilian “victims.” Militants plan to use child hostages in the staged incident, according to Antonov.

Such a scenario sounds similar to what Russia alleges happened in April 2017 in Idlib, where there was never so much as an on-the-ground investigation to collect evidence to back the Khan Sheikhoun claimed “sarin attack” incident, which resulted in the Trump White House bombing Syria on mere “rebel” claims and YouTube videos, before waiting for any confirmed scientific proof to back the claims.  

To this day the international chemical investigative body and watchdog, the OPCW, has yet to visit the site due to its being controlled by al-Qaeda forces. 

Meanwhile, a former Pentagon official, Michael Maloof, told RT that if a major publicized chemical attack claim is made and is quickly echoed in the media, the “burden of proof” won’t matter as Washington and its allies will use it as leverage anyway.

“If history is any precedent, they won’t bother. They did not investigate the last episode before they launched a missile attack into Syria and there’s no reason to suspect that they will this time either,” Maloof said. 

“The whole idea is to embarrass Moscow and to intimidate Damascus,” he said.

It appears that Russia is exhausting every diplomatic channel to prevent such a scenario from unfolding; however, mainstream US pundits are already accusing Russia of paving the way for a Syrian regime chemical attack via preliminary propaganda.

However, its difficult to understand what Moscow and Damascus would stand to gain from doing the one thing that ensures greater Western military intervention at the very moment Assad stands with the clear momentum of victory on this side. 

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Authored by Jason Ditz via AntiWar.com,

…says report ignores the “true reasons for the conflict”

A Tuesday report released by the UN confirmed in considerable detail misdeeds by the Saudi-led coalition in Yemen, killing thousands of civilians in Yemen, raping and torturing detainees, and using child soldiers. The report warned these may amount to war crimes.

While they didn’t specifically dispute any of this, Saudi Arabia was predictably furious about the report, angrily condemning it as having “misconstrued the facts of the conflict… ignoring the true reasons for the conflict,” while saying that it was an Iranian coup against the “legitimate government in Yemen.”

While previous UN resolutions more or less accepted the Saudi narrative that the war is meant to reinstall the Hadi government, that massive death toll and the many, many war crimes committed have fueled a lot of international consternation.

Still, UN reports detailing war crimes by the Saudi coalition have been met by Saudi condemnation, and in the past that, combined with US support for the war, has been enough to keep the UN from doing anything in particular about the situation.

The UN General Assembly has repeatedly acquiesced to demands that the Saudis be allowed to investigate themselves on the war, which has meant probes are rare, and never come up with anything meaningful.

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…millions of exuberant stock-buying voices cried out in terror, and were suddenly silenced.

Headlines from The Wall Street Journal that merely confirmed what everyone and their pet rabbit already knew – that $200 billion more China tariffs were set to hit next week – sparked selling… everywhere.

While WSJ admits that Trump has yet to make up his mind, they report sources say he backs the additional tariffs (which anyone who can fog a mirror would know from his stance for the last month).

US Stocks dumped…

Yuan is getting whacked…

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Authored by Nick Cunningham via Oilprice.com,

Mexico is considering a dramatic policy shift, inserting the state into the energy sector in a major way while also flirting with the idea of moving closer to OPEC.

A document seen by Reuters, drafted by advisors to incoming Mexican president Andres Manuel Lopez Obrador (AMLO), proposes withdrawing Mexico from the International Energy Agency (IEA) and moving closer to OPEC.

The proposal also calls for scrapping future oil and gas auctions, which would close off Mexico’s oil and gas reserves to international companies beyond what was already awarded. Unlike previous reports, which suggested that AMLO’s government might suspend auctions for two years, the document seen by Reuters calls for an indefinite suspension of new auctions.

The move would be a nearly 180-degree turn from the current government of President Enrique Pena Nieto, whose legacy will be defined at least in part by the reforms and partial privatization of Mexico’s energy sector, while stopping short of complete reversal, which would require constitutional changes. Over 100 contracts were inked with international oil and gas companies, and Pena Nieto’s government has said those will pave the way for tens of billions of dollars’ worth of investment.

Instead of greater involvement from oil and gas multinationals, Pemex would return to its former role as the central pillar in Mexico’s energy industry. The state-owned oil company held a monopoly over the country’s oil and gas reserves for seven decades, but has been bogged down under a massive pile of debt. AMLO wants to inject new life into the company and elevate it back into a powerful position, acting somewhat as a gatekeeper for the country’s energy sector by having the ability to make its own decisions about joint venture partners.

“The terms for formalizing partnerships or associations will be established by Pemex’s board of directors, according to the law,” the 33-page document written by AMLO’s advisors says. The initiative would elevate Pemex while watering down restrictions currently placed on the state-owned company. Also, the document calls for the “indefinite suspension of international exploration and production auctions.”

It is unclear at this moment how much sway the document will have over AMLO, or to what degree the document will be translated into official policy. As Reuters notes, AMLO has assembled a team with a wide range of opinions and philosophies. On the one hand, his head of transition is Alfonso Romo, a financier and business titan from Mexico’s industrial north, who has preached orthodox economic policies and has tried to reassure investors that AMLO presents no threat to their interests.

“I don’t see changes” to the 2013-2014 energy reforms, Romo said a few days after AMLO’s historic election victory in July. “If anything happens, it would be done without hurting private investment.” He noted that Mexico is aiming to revive oil production and that the private sector will be leading the way. “Mexico has a necessity for lots of money for offshore drilling,” Romo said, according to Bloomberg. If production rebounds “no one will fight success.”

On the other hand, AMLO’s incoming energy minister, Rocio Nahle, supports a stronger role for the state. “We will be assessing if any legislative changes (to the oil opening) are necessary,” she said in July. Nahle is known to have decorated her office with pictures of AMLO and former Mexican president Lazaro Cardenas, who nationalized the oil industry in 1938. She has also voiced support for stricter local content rules in an effort to capture more of the benefits of oil and gas investment for Mexican companies, requirements that foreign oil companies would oppose.

Romo and Nahle, representing two ends of a spectrum regarding state intervention in the economy, are working in the same administration. There seems to be a gulf between them, ideologically speaking, which has led to uncertainty about the administration’s intentions.

Still, U.S. Secretary of Energy Rick Perry did not seem concerned after meeting both Romo and Nahle after visiting Mexico City earlier this month. “What I heard today was a bit of realism from both Nahle and Romo,” Perry said, without going into detail, according to Reuters.

If the document seen by Reuters is anything to go by, Nahle would presumably have the upper hand on energy policy, as it would mark the most dramatic policy shift proposed by the AMLO team to date.

Previously, AMLO proposed a revitalization of the downstream sector, rehabbing old refineries and building at least one new facility, with the aim of ending gasoline imports.

This new document goes further, ending auctions to the private sector and strengthening Pemex’s authority.

Perhaps most intriguing is the proposal to withdraw from the IEA and explore “the possibility of a closer approach and better coordination” with OPEC. The IEA is a group of industrialized countries, mostly from North America and Western Europe, that coordinate energy policy. The IEA was setup after the Arab oil embargo in 1973 with the intention of preventing a supply crunch, and each member country pledges to hold strategic oil stockpiles that can be used in the event of an unforeseen outage.

As for OPEC, it isn’t clear what the policy document would mean in practice. Mexico is participating in the OPEC/non-OPEC (or OPEC+) production cut deal, which began at the start of 2017. The production curbs from Mexico have been nominal and symbolic, since output has been in decline anyway, but Mexico’s involvement means that it is already coordinating with OPEC to some degree. Deepening involvement would, in theory, mean that the administration would be open to exploring the possibility of membership in the oil cartel.

A lot remains to be seen, and the document may not form the basis of AMLO’s energy policy. But if it does, a move away from the IEA, away from private sector involvement, and toward OPEC would represent a significant policy shift.

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Back in November, still smarting from a year he would rather forget, Russell Clark and his Horseman Capital, i.e. the “world’s most bearish hedge fund” unveiled what he would short next: according to Clark, the next major source of alpha would be shorting fallen angel bonds, or those investment grade companies in danger of being downgraded to junk.

Citing a recent IMF Global Financial Report, Clark said that “US investment grade debt is very low quality, and could produce some large fallen angels [and] mutual funds are much larger in the high yield market than they used to be. [L]ow rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me.”

One month later, in the aftermath of of Steinhoff fiasco, in which the ECB found itself long tens of millions of bonds in a company which went from investment grade to deep junk after it was revealed that it may have engaged in occasional fraud, crashing the bonds…

… Mario Draghi only made the bearish “fallen angel” case more explicit, by clarifying that going forward the ECB would likely liquidate bonds which were purchased as IG and subsequently downgraded to Junk (as we explained in detail in “The ECB Has Some Bad News For Junk Bond Buyers“)

Then, at the start of June, legendary distressed invstor, Oaktree Capital, joined the bandwagon of fallen angel hunters, saying that the fund “expects to see a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds.”

Speaking at the Bernstein Strategic Decisions Conference, Oaktree Capital’s Chief Executive Jay Wintrob said that when the cycle turns it will be faster and larger than ever as “fallen angels” proliferate, and added ominously that “there will be a spark that lights that fire.”

Picking up on last week’s warnings by Moody’s, in which the rating agency warned of a junk bond default avalanche as rates rise, Wintrob said that the supply of low-quality debt is significantly higher than prior periods, while the lack of covenant protections makes investing in shaky creditors riskier than ever.

According to the Oaktree CEO, those structural flaws of the bond market mean debt will fall into distress quickly once conditions flip, and “Oaktree is prepared with about $20 billion saved for future investing opportunities.”

That number may be woefully insufficient: the total kept by S&P Global Ratings of potential “fallen angels”, or those investment grade companies in danger of being downgraded to junk, stood at just 45 in April, with $119.3 billion of debt outstanding according to Bloomberg. This is where Oaktree came in, with the rhetorical question posed by Wintrob to lenders, who “should be asking themselves if the market can continue to lend and extend maturities of debt at very low rates.“

The potential opportunity for Oaktree is so pressing that the fund has now allocated about a quarter of its assets to troubled issuers.

To be sure, Horseman and Oaktree are not alone preparing for a surge in troubled issuers. The amount of “dry powder” held by fund managers to invest in low-quality debt has grown to around $150 billion, Wintrob estimated. Quoted by Bloomberg, he said this number has shown steady growth as the duration of bonds has increased, which could make the coming price drops even more significant than during the turn of the last credit cycle in 2008.

Which of course would be great news for America’s bankruptcy advisors: as a reminder, a few months ago we quoted Moelis’ co-head of restructuring Bill Derrough who said that “I do think we’re all feeling like where we were back in 2007,” adding that “there was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time.”

All that is needed is the spark.

* * *

And so, with everyone lying in wait for the proverbial “spark that lights the fire” and leads to the next inevitable bond crash, yesterday Moody’s may have been playing with fire when the rating agency downgraded Ford Motor’s credit rating was to just one notch above junk, making it the biggest single “fallen angel” candidate in the US bond market.

Adding to Ford’s recent woes after it embarked on a costly restructuring that could take years to complete, and rising costs as a result of Trump’s auto tariffs, on Wednesday Moody’s downgraded Ford to Baa3 from Baa2 with a negative outlook, which means that just one more downgrade, and Ford will be rated junk. 

The ratings company cited erosion in Ford’s “global business position and the challenges it will face implementing” its restructuring effort that could rack up $11 billion in the next three to five years.

Ford’s 5.291% notes due 2046 were among the biggest decliners in the investment grade market in the past two days, falling to the lowest since their 2016 issue, or just under 90 cents on the dollar…

… resulting in a generous yield of over 6%, nearly unheard of for an IG issuer these days.

As Bloomberg notes, a descent into junk would be a blow to Ford after six years of investment-grade status. Ford avoided joining its U.S. peers in bankruptcy during the financial crisis, largely thanks to more than $23 billion in loans taken out in 2006. Now, this massive debt pile is coming to haunt the company.

Moody’s is just the first: last month, S&P cut Ford’s outlook to negative from stable and said prolonged weakness in profit and cash flow made a downgrade within two years increasingly likely. S&P rates Ford at BBB, two levels above speculative grade. But that will likely change soon, after the automaker lowered its profit forecast for the year, and is facing a number of headwinds beyond exiting the slowing sedan business in North America. The cost of complying with tougher emission rules in Europe and updating a stale product line in Asia contributed to second-quarter losses in those regions.

Earlier this year, Ford announced it would exit its storied U.S. sedan business, sending shock waves through the auto landscape. In addition, Ford and its Detroit counterparts have been in the crossfire of President Donald Trump’s trade talks with China and Mexico this year, causing volatility among U.S. automakers.

Commenting on the downgrade, Ford spokesman Brad Carroll said the company has had solid financial results and operating cash flows.

“The company has a strong balance sheet, which provides financial flexibility. We know we can capitalize on our strengths, bolster underperforming products and regions and disposition where we cannot make an appropriate return. We’re confident that as we do, the market will recognize our progress.”

Well, it had a strong balance sheet, not so sure about has, because adding to the income statement “perfect storm” is Ford’s rising debt/EBITDA, which has risen from 2.6x to 3.3x between 2016 and the twelve months ending June 2018.

It goes without saying, that slipping closer to junk status puts Ford at risk of higher borrowing costs, while an outright downgrade to junk would unleash a toxic spiral of surging interest rates at a time when Ford’s profitability is sliding fast, forcing the company to issue even more debt to fund its operations, until one day creditors pull the plug.

But here is the bigger problem: Ford – which is now in danger of being a historic “fallen angel” – has more than $80 billion in debt, and would become one of the biggest issuers in the U.S. high-yield bond market if it gets downgraded even one more notch.

Of course, it may not be Ford that catalyzes the crash: as Oaktree warned there is now “a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds.”

However, it would be poetic justice if the auto company that avoided bankruptcy during the Global Financial Crisis is the “spark” that – with its downgrade to junk – is the catalyst that unleashes the next bond market crash, as investors finally flee from the $1+ trillion US junk bond market, precipitating a cascade of selling that spreads into investment grade and, eventually, equities.

Which brings us back to the words from Moelis’ co-head of restructuring Bill Derrough who in may said that “I do think we’re all feeling like where we were back in 2007; there was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time.”

That time may be almost here.

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Authored by Simon Black via SovereignMan.com,

Hallelujah, the US stock market is once again at an all-time high thanks to a little help from our friends at the Federal Reserve.

Every summer, central bank officials from around the world gather in Jackson Hole, Wyoming (which, if you haven’t been, is REALLY spectacular. Jackson Hole, that is, not the Fed conference.)

The event was held last week. And the main event was a speech from the new(ish) Fed Chairman Jerome Powell.

His tone was decidedly ‘dovish’, as the commentators on CNBC will tell you. Dovish is code for “We’re going to keep interest rates low for as long as we can.”

And on that news, the market soared. That’s all anyone needed to know.

Everyone loves low interest rates.

Low interest rates mean that we don’t have to be responsible anymore. We can borrow from future prosperity in order to consume today.

We can buy a bigger house than we should realistically be able to afford…

or go into debt to pay a record high price for a university education that teaches young people to value safe spaces over intellectual curiosity…

Low interest rates help companies continue down the most absurdly destructive paths, like going deeper into debt to finance businesses that burn through billions of dollars each quarter.

Bear in mind that the entire reason the Federal Reserve even exists is to put more money in the pockets of the banks ensure a ‘stable financial system’.

Officially this means making sure that both inflation and unemployment remain relatively low. And they do this by fiddling with interest rates.

If the unemployment rises too high, for example, the Fed waves its magic wand and slashes interest rates.

In theory this would get people to start borrowing (and spending) again, causing an increase in economic activity… and creating more jobs.

On the other hand, if inflation starts getting out of control, the Fed would jack up interest rates and put the brakes on spending and borrowing… giving prices a chance to cool off.

Essentially, by increasing or decreasing interest rates, a tiny, unelected committee of central bankers has the power to radically alter our buying and investment decisions.

Now, one would hope that this tiny, unelected committee would be unparalleled in its genius and ability to foresee the world’s economic future.

But sadly this is not the case.

And if you need proof of this, just consider this collection of quotes from Treasury Secretary Hank Paulson (also ex-CEO of Goldman Sachs) and former Federal Reserve Chairman Ben Bernanke around the time of the Great Financial Crisis ten years ago.

For context, remember that the stock market peaked in October 2007. And the crisis really kicked off on September 15, 2008 when investment bank Lehman Brothers failed.

(The market then tanked, dragging the economy with it, reaching bottom in March 2009.)

Queue the blooper real…

In an interview in July 2005, in response to a question about a potential housing bubble and possible recession, Chairman Bernanke responded:

“Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.”

And in January 2008, one month after the recession officially started, Bernanke said:

“The Federal Reserve is not currently forecasting a recession.”

Then Paulson in February 2008:

The economy “is fundamentally strong, diverse and resilient. . .”

Treasury Secretary Hank Paulson in May 2008, with about a year of carnage remaining:

“In my judgment, we are closer to the end of the market turmoil than the beginning.”

Bernanke from June 2008, just three months before the big crash:

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

And this one from Paulson in July 2008, T-60 days from an epic Wall Street meltdown:

“Our banking system is a safe and a sound one.”

Bottom line, human beings are fallible, imperfect creatures. So are central bankers.

The expectations that a handful of [did I mention they are unelected?] bureaucrats can possibly control all the levers of the largest economy in the world with flawless precision is an insane fantasy.

So now Chairman Powell is telling us that there’s nothing to worry about.

He described his strategy as looking “beyond inflation for signs of excesses” and set policy according to that.

In other words, the Fed is watching out for signs of ‘excess’. But so far they don’t see any.

Uhh… What planet are these people living on?

Let’s look at the obvious:

First off, there’s the nearly $10 TRILLION of bonds that still trade at negative yields. Excessive?

Or the fact that companies like WeWork, Tesla and Netflix are able to raise billions of dollars despite continuously losing money… and their stock prices and valuations SOAR. Excessive?

A friend in New York told me there’s currently a 10-year waiting list to buy a Patek Philippe Nautilus – a $30,000 stainless steel watch. Excessive?

There’s also a $1 billion plot of residential land for sale in Beverly Hills and a Leonardo Da Vinci painting that recently sold for $450 million. Excessive?

There’s simply too much money in the world today, as a direct result of the Fed keeping interest rates too low for too long and printing trillions of dollars.

Everywhere you look today, financial absurdities are staring right back at you.

But the Fed has turned a blind eye to all of these excesses.

The important thing to remember is that no one can predict the future… including [wait for it–] unelected central bankers who wield totalitarian control over the economy.

 They are going to screw up. They have screwed up.

In the past they have completely and totally missed the warning signs of the biggest financial meltdown since the Great Depression.

And it would be utterly foolish to think they’re not going to miss the next one.

And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.

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