The “credit cycle” begins to unravel.
One of the big indicators of the end of the “credit cycle” is the number of bankruptcies. During good times, so earlier in the credit cycle, companies borrow money. Then, overconfident and lured by low interest rates and overoptimistic rosy-scenario rhetoric emanating from all sides, they do what the Fed and Wall-Street firms want them to do: they borrow even more money. Then reality sets in, and they buckle under this pile of debt.
The bankruptcy filings of Ultra Petroleum and Midstates Petroleum on Friday and Saturday brought oil & gas bankruptcies of companies rated by Fitch and other ratings agencies to 59. These two companies piled $3.1 billion in defaulted junk bonds and another $1.5 billion in defaulted loans on top of the growing mountain of defaulted oil & gas debt.
With these two bankruptcies, Fitch Ratings raised its high-yield energy default rate to an all-time record of 13% and now projects that by the end of 2016, this default rate will jump to an even more glorious record of 20%.
But it’s not just oil and gas. And it’s not just companies whose bonds and loans are traded and are rated by Fitch and other ratings agencies. These are the larger outfits – big enough to have bondholders and big enough for the financial media to report.
But bankruptcies of all kinds and sizes and in a wide variety of sectors are now soaring.
Total US commercial bankruptcy filings in April rose 3% from March and soared 32% from a year ago, to 3,482, the American Bankruptcy Institute just reported. It was the sixth month in a row of year-over-year increases.
Of these commercial bankruptcies in April, 680 were Chapter 11 filings, up 67% year-over-year! The rest were liquidations. And the pace is quickening: In just one month, from 450 in March, Chapter 11 filings have skyrocketed 51%!
The ABI pointed at distress in a “number of sectors, including energy and retail.”
The broadening scope of this wave of bankruptcies is a strong indicator that the credit cycle has ended, that the credit bubble created by the Fed to reflate the collapsed prior credit bubble is now also deflating. But this time, the Fed, after incessantly flipflopping, still has interest rates pegged at near zero.
Furthermore, bigger US companies can issue bonds at crazy-low yields in Europe were yield-starved investors, driven to insanity by the ECB’s negative interest rate policies, are eager to buy our “reverse Yankee” landmines. In addition – and this takes the cake – bonds issued by US companies with entities in Europe are even eligible for the ECB’s corporate QE bond-buying program. Rarely, according to my memory, has Europe been this stupid.
It means that big US companies with a halfway decent credit rating and a business model that the market perceives as functional still have access to plenty of easy and cheap credit.
But smaller companies, including tiny operations with one or two folks breaking their backs trying to make something work, don’t have these options.
When they face operational challenges and too much debt, the bell is ringing. Just when they need the money the most because they’re bleeding and blew through their equity and have nothing left to leverage and all the collateral has been pledged, they’re cut off as lenders try to limit the damage. And that pushes them into bankruptcy.
At the end of the credit cycle, the excess debt that was piled on during the heyday goes bad and needs to be restructured. Creditors are coming to grips with losses. Banks are writing down their loans. Bondholders take their licks. Equity holders often lose everything. And this is just the beginning.
Another day, another bankruptcy of a brick-and-mortar retailer. They’re in a very tough business. They’re besieged by online competition and other desperate brick-and-mortar retailers. They have big expenses. And they face strung-out American consumers. Throw a lot of debt into the mix, and it can turn toxic in a minute. Read… This is Why No One Should Bail Out the “Smart Money” Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears
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The glass-steagal act used to be a hedge against these types of wild fluctations. It worked well for over 55yrs. But 9-short years after its repeal, we experieced a total collapse in banks, insurance & stocks that required a gov’t, and then a red reserve bail out. And we still have not recovered. The federal reserve was created in what ? 1916 as a response to repeated stock market collapses. But 13 yrs later we had the mother of them all….then in @ 1934 the glass-steagal act permantly separated banks-stocks-and insurance companies…..well that was until 1999—then we had a bubble bigger than 1929….but this time the govt (tax-payers) bailed them out. We still have not recovered. From 1934 till 2008 we had the normal business cycle of boom & recession every few years. But now, without a “natural” correction, we are just kicking the can down the road to perserve the retirement, welfare, annuities, social security built by previous generation in their ponzy scheme–that revolves around the American stock market. Politicians, bankers, insurance companies, stock brokers are just trying to get the last little bit, as long as they can from the current and next generation.
Yes, yes, yes and yes.
It’s a vast injustice. You can thank Obama, Geithner, Holder, and Bernanke. Bailing out the crooks without any punishment or reform was an obvious mistake. It’s a miserable legacy for Obama.
I know, the banks have since been fined. Must be rough on them. The distracted millennials have been rewarded with debt and punitive rents.
actually the bail out was conceived and passed by BushII not Obama. Not that Obama did anything positive like indict or prosecute any of those who’s fiduciary duty was to their clients when they actually were representing themselves.
Obama was a key figure in pushing TARP over the objection of Congress if you recall. It was actually voted down once.
. Promises made – NONE delivered.
many Republicans who voted for the first tranche of the TARP were leery about this second vote, because at least $23.4 billion of the initial outlay has been used, over their objections, to bail out the auto industry….
Still, many Democrats said on Monday that Obama’s letter was not enough to convince them to vote against the resolution, which was filed by Senator David Vitter, a Louisiana Republican. Most fiscal conservatives, like Vitter, opposed the TARP from its inception, and even those who voted to pass it in September have insisted that something more than Obama’s vague promises is needed to win their grudging support.
So what did Obama say to charm his former colleagues into blocking the resolution? He promised to write, in a detailed manner, a letter explaining how his Administration would dole out the funds once he is sworn in on Jan. 20. “The conditions have to do with tracking the money, how the money can and can’t be used, accountability for the money, what dividends cannot be spent with it, the executive pay issues,” said Senator Carl Levin, a Michigan Democrat, emerging from the meeting. “In other words, there’s a whole host of misuses of the first half which have to be avoided the second time around.” The detailed letter, which may come from Obama’s economic adviser Larry Summers, is expected to arrive before a potential vote on Thursday. Levin added that such a letter would be enough for him to vote against the resolution.
http://content.time.com/time/business/article/0,8599,1871532,00.html
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.. Promises made – NONE delivered.
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It’s not money
It’s not even paper notes or currency
It is electronic digital computer keyboard entries.
It makes no difference.
Glass-Steagal was NOT a hedge against stock market fluctuations !!!! It was a law against the FRAUD of financialization (IE artificial inflation garnered to siphon wealth).
The issue is not the Federal Reserve. Our representatives in congress no longer represent the interests of the people. Therefore we have taxation without representation. Jefferson had thoughts on that.
Or it may represent political conflict leading to gridlock and making the Fed the only actor, which I believe is Yellen’s view. So we await a big enough political shift to attempt to take control from the technocrats. This may be in vain because the technocrats are always needed anyway. I thought this might happen in 2008 but Obama made his bet on RomneyCare.
“The issue is not the Federal Reserve. Our representatives in congress no longer represent the interests of the people.”
Congress does not represent the general population because corporatists, including those who control the Fed, have deeply corrupted it.
What do you suppose the purpose of the Fed is? It is to ensure control of U.S. currency, and by extension, national finances and the national economy, by pathological persons who are out to bleed the country. Every U.S. president before Reagan has been aware of the corruption of financiers and has made that awareness public. Since Reagan every president buys into that corruption and it has become entrenched.
Taxation without representation is the least of your problems.
It IS the Federal Reserve. Do some research. It’s origins. It’s history. Who pushed it through Congress? (Hint, he married John D. Rockefeller’s (Sr.) daughter. So, while HE got screwed, so did we).
Glass and Owen sponsored the bill. Who is the mystery man? Jr married US Senator Aldrich’s daughter Abbey. Is that who you mean? Aldrich was chairman of the National Monetary Commission which Wilson patterned the Fed after.
Yes, Aldrich, Senator from Rhode Island, helped push the Federal Reserve Act through congress. Many books have been published about these activities.
Honor among thieves.
The problem is we have “Financial Perverts” running these large companies, Central Banks and the Governments! Yup “Financial Perverts”!
Not correct.
They are smart. They are the smartest people on this Planet.
We, You, the Voters are the idiots.
The market will hold up. No way its going down before the elections. People have been predicting the markets demise for 6 to 7 years now.
Its not going to happen yet. I am absolutely right. We may have a dp but not below this years previous low before the elections.
And so it begins. The lay offs will be massive!
Keep stacking
But more importantly Sancho, are you on the Volcano Set tonight?
Some of us are and some of us aren’t Sancho…the ones I honor are the ones providing jobs for others. :)
Look at the bright side. The employment print today is lousy, which means wage pressure goes away. No June interest rate bump. Therefore buy stocks!
From CH Smith
One Chart Says It All
http://charleshughsmith.blogspot.com/2016/05/one-chart-says-it-all.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+google%2FRzFQ+%28oftwominds%29
Hard to have a recovery when the Velocity of Money is in fast retreat. Those who have the money don’t buy consumer goods, they invest and investing today means buying stocks and bonds and old paintings etc.. none of which has any positive economic effect. Or obviously not enough.. there has been very little Trickle Down.
All this personal greed at the top has done is make things they purchase more expensive and little else. They really don’t get much more yet need more and more just to feel the same. It is stupid! They are stupid as the consequences of their lobbying and pay offs ends up killing the golden goose that has been so successfully laying them golden eggs.
And the pot is simmering and IMO getting ready to boil over.
Trickle down is a product of inefficiency. The more efficient the closer to perfection the less the need.
How about ….Both parties are screwing us. The blame game is so F-ing stupid. Until the lazy-assed American public, does something about these CROOKS, it won’t make a difference who gets in the White house. Big business runs this country , We don’t!