THE WOLF STREET REPORT

The Junk-Bond Market Just “Puked.”

Risk is getting repriced. And rather suddenly. What are the real-world consequences? And how will it impact stocks?

The Fed has warned about them, and investors fear a run-on-the-fund. Read…  $1.3 Trillion “Leveraged Loan” Boom Comes Unglued

 

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  37 comments for “THE WOLF STREET REPORT

  1. Javert Chip
    Dec 23, 2018 at 9:48 pm

    Besides absolutely loving the headline, it’s interesting to watch “yield-hunting smarter than every body else” junk-bond guys run around like crazy to fined all the greater fools.

    If only this stuff could happen without serious damage to the real economy, not to mention a lot of this puke washing down on tax-payers.

    • polecat
      Dec 24, 2018 at 10:24 am

      Forward Puke Shields up, Capt. Chip !!

  2. Timothy J McLean
    Dec 23, 2018 at 11:09 pm

    Wolf is absolutely correct. Examples are Snap, Wayfair and Zillow

    • 2banana
      Dec 23, 2018 at 11:18 pm

      Tesla, Netflix, Blue Apron, Uber…

      • polecat
        Dec 24, 2018 at 10:26 am

        Yippykiyayyyyyy !

    • NY Geezer
      Dec 24, 2018 at 12:07 pm

      Examples must include the frakers too.

  3. 2banana
    Dec 23, 2018 at 11:16 pm

    2012-2016 – Invest in “disrupt the marketplace” companies. Chase those yields. High tech stocks will make you rich even with no profits and massive debts.

    2019 – Fundamentals matter again. Yellen bucks found their places to die.

  4. Bill from Australia
    Dec 23, 2018 at 11:28 pm

    Now that the punch bowl has been removed , time to move on to a good single malt.I wish you, Wolf and your family a happy Christmas and look forward to your comments in 2019, its going to be interesting.

  5. Rowen
    Dec 24, 2018 at 12:19 am

    One thing is obvious. The Fed as the sole monetary transmission vehicle is ineffective, especially after the repeal of Glass-Steagall . They’re better off using Bernanke’s helicopter drop or direct funding of real infrastructure.

    That much stimulus without effective taxation and regulation merely goes into funding the activities that destroy the Middle Class.
    Mergers/acquisitions that destroy jobs. Leveraged buyouts that reward guys like Eddie Lampert for running Sears into the ground. Speculation that gooses up commodity and real estate prices.

    • MD
      Dec 24, 2018 at 6:24 am

      “That much stimulus without effective taxation and regulation merely goes into funding the activities that destroy the Middle Class.
      Mergers/acquisitions that destroy jobs. Leveraged buyouts that reward guys like Eddie Lampert for running Sears into the ground. Speculation that gooses up commodity and real estate prices.”

      Yup – which is exactly why so much money is plowed into right-wing ‘think tanks’ [propaganda outlets] by wealthy benefactors such as Mr. Lampert to convince the great unwashed that the problem isn’t the greed and tax avoidance/evasion of the wealthy individual/r- it’s ‘too much government regulation and red tape’ which causes the problem.

      Process/message (lies) are exactly the same across all countries that have adopted the bankrupt[ing] ideology of neoliberal economics; ie those societies that cannot support their democratic infrastructure because the money previously employed to do so is now funneled into the pockets of wealthy stockholders – hence your massive and increasing wealth gap.

      There really is no mystery behind our problems; they started 45 years ago and are the product of the strange belief that the only way to organize a country’s economy is for the benefit of the wealthy, and that their ‘trickle down’ munificence will provide for us all.

      All lies.

      • Bobber
        Dec 24, 2018 at 2:07 pm

        What do you mean MD? This seems to counter common logic such as:

        Tax cuts to the wealthy pay for themselves.

        Government deficits do not matter.

        Government debt never needs to be repaid.

        Tax cuts to “job creators” benefit everyone.

        Employee unions are the problem.

        Stock buybacks create shareholder value.

        You need to pay $100M to find a good executive.

        The Board of Directors will enforce fiduciary duties.

        The bottom 49% is a leech on the system, begging for handouts.

        Corporations need huge subsidies and low taxes to compete.

        Outsourcing of jobs creates more jobs in the long run.

        Corporate titans should be revered by society.

        …….I could go on but it’s dampening my Christmas Eve.

        • Dec 29, 2018 at 1:03 pm

          That list… would’ve taken me a weekend to write so succintly. Good work, although I suspect you’ve been brooding on this ;)

        • Adam Eran
          Dec 30, 2018 at 2:24 pm

          Unfortunately, you repeat two myths among the otherwise canny comments. Namely: Government deficits do not matter. Government debt never needs to be repaid.

          Deficits do matter, but not the way you think. Government “debt” is not like household debt. It’s like bank debt.

          If you have a bank account, that’s your asset…but what is it to the bank? A liability (i.e. debt)!

          When you write a check, you assign a portion of the bank’s debt to the payee. Currency is just checks drawn on the central bank (The Federal Reserve) in fixed amounts. Currency appears on the Fed’s books as a liability, too.

          So…imagine a crowd of depositors, replete with pitchforks and torches, going down to their bank, demanding that the bank increase its fees, or decrease the interest paid on savings so its ‘debt’ would diminish!… Not very sensible, is it?

          That’s the austerity-producing “Fiscal Responsibility[tm]” in action.

          For more, see https://www.huffingtonpost.com/l-randall-wray/the-federal-budget-is-not_b_457404.html

  6. Neal Woods
    Dec 24, 2018 at 12:26 am

    Merry Christmas! Thanks for the Report!

  7. KMOUT
    Dec 24, 2018 at 12:36 am

    Sitting in all cash IBD style for a month (YES!) and wishing all you Wolfies a Merry Christmas and a happy new year. Was a great ride up and,
    Gonna be an interesting ride down.
    KMOUT

    • kitten lopez
      Dec 24, 2018 at 1:06 pm

      WOLFIES!!!!
      and thus it is som as we don’t ever get to choose our own nicknames.
      so yeah, merry everything to the other Wolfies on here, too. thanks for making it so’s none of us feels as alone as we were supposed to in all this.

      x

  8. Shane From Melbourne
    Dec 24, 2018 at 1:25 am

    Roses are red, violets are blue.
    The Fed lifted interest rates,
    Now we are all in the poo.

  9. ISMAR
    Dec 24, 2018 at 2:29 am

    Excellent analyse wolf happy new year 2019 and good luck.

  10. Nicko2
    Dec 24, 2018 at 4:12 am

    Merry Christmas to all. I have a feeling 2019 is gonna be one wild ride.

  11. Investor in Japan
    Dec 24, 2018 at 4:24 am

    Wolf, great report!
    Merry Christmas and best wishes for the new year!
    Love your work!

  12. breamrod
    Dec 24, 2018 at 7:17 am

    Happy New Year Wolf. You’ve got the best financial site on the internet and I read them all! Many thanks for what you do!

  13. Marcus
    Dec 24, 2018 at 9:39 am

    Perusing around the internet, there are plenty of stories from “experts” saying that all is well. This seems to be based on the premise that the general economy is strong and banks are capitalized. But, can’t this change on a dime? I mean, housing is over the hump and heading down. Auto sales (not just numbers, but also prices and subprime loans) have been outrageous for years and seem to be losing steam. The junk and just-above-junk company debt has been bringing future money into the present, and that borrowed money is supporting the broader economy. So, if the economy is growing steadily in the presence of massive debt, wouldn’t a freeze in pretty much any sector trigger a shockwave? I just keep looking at old charts of, well, pretty much anything that shot up like the recent stock market, corporate debt, housing price index, etc. And every chart resolves in the same way. It’s a plunge, not a wind-down. Why would this be different?

    • Tim
      Dec 24, 2018 at 12:48 pm

      As we learned last time around, “banks are absolutely fine – right up to the day when they’re not”.

  14. Clete
    Dec 24, 2018 at 11:26 am

    Merry Christmas, Happy New Year, and thanks to Wolf and all y’all for the insight and learning this FNG has enjoyed here since I found you.

  15. Mike R
    Dec 24, 2018 at 11:31 am

    Actually, I think Munchkin just puked. Did Trump really talk him into holding a ‘PPT Meeting’ and to send out a stupid Tweet that said Trump TOLD HIM to say Trump didn’t talk about firing Powell ?

    OMG, what a bunch of rank amateurs.

    The two of them are going to create the next crash by themselves. The dems really have to do nothing, sit tight, and watch Trump implode. No impeachment needed.

  16. Dec 24, 2018 at 11:52 am

    Fed raises short term rates incrementally, causes a drop in long term rates exponentially? (So fast that HY has been hung out) The Fed really cares more about the bond market, okay? They tighten policy a little and create a giant wave of easy credit, at the corporate level, despite what the high yield market is doing at the moment rates are falling too fast.
    Some of that is recession fears, and the Fed didn’t cause that. The rest is “sell everything” opposite of of “let it ride”. Corporate bonds will never blow up Netflix, or marginally Tesla. What might happen is a full blown deflationary crash, if the Fed pulls back.
    I would raise rates to 5% between meetings. That might be a 100% premium to inflation, cause real rates to go positive and accurately price risk. Certain elements of gov have their finger on the doomsday button, the Fed can pretend that being a deer in the headlights is really prudent, or it can act.

  17. njbr
    Dec 24, 2018 at 12:02 pm

    Thanks for the insight this year, Sir Richter !! You have awakened me from my slumber.

    Moved many investments from “dead head” indexes to pick and choose funds, “riding the lightning”, and mostly cash and made it truly a Merry Christmas and a Happy New Year.

    Why ride the market down again when the need for income arises in the next five years? “But index funds have always made money”—IN THE LONG TERM

    Chaos will continue fort he foreseeable future…

  18. Iapetus
    Dec 24, 2018 at 12:31 pm

    Wolf – thanks for the excellent analysis of our current market situation.

    The corporate debt bubble was not inflated by investors reallocating a fixed pool of money in U.S. debt markets towards this highest yielding sector, but rather it was mostly inflated by new investors who meaningfully expanded the size of U.S. debt markets and had a preference for the higher yielding corporate sector. Since the great financial crisis we’ve seen a massive accumulation of cash by companies which defer taxes on their profits by stashing it in overseas legal entities, and another pool of overseas cash fleeing their local debt markets because of ultralow interest rates engineered by their central banks. These pools collectively amount to trillions of dollars, and are invested in U.S. debt so that money could be withdrawn at a maturity date without having to incur the losses of a large asset liquidation.

    Last years Tax Cuts and Jobs Act, more colloquially known as the Trump Tax Plan, was effectively a Tax Holiday which allows the repatriation of these ‘overseas’ corporate profits at a deeply discounted tax rate. The 2008 bank bailout ( Emergency Economic Stabilization Act of 2008 ) closed another tax loophole, and gave hedge funds until April 2018 to pay taxes on a 2% management fee they had been accumulating in offshore reinsurance companies for decades. Lastly, a steepening overseas yield curve is enticing international investors to liquidate some of their U.S. overseas debt to and bring it back home to local debt markets.

    https://www.bloomberg.com/news/articles/2018-08-02/kuroda-s-curve-tweak-may-have-just-put-2-4-trillion-in-play

    So trillions of dollars that helped inflate our corporate debt market will be leaving and not available for new investments in the near future. Total outstanding corporate debt has grown from $4.9 trillion in 2007, to nearly $9.1 trillion in 2018. As you have pointed out, approximately $2.6 Trillion of this amount is ‘junk’ debt split evenly between junk bonds and leveraged loans. As you have also pointed out, a good portion of this debt was spent on unprofitable strategies including stock buybacks, leveraged buyouts, and on cash-flow negative companies which have rarely ever been profitable ( see tech unicorns and shale oil producers ).

    A shrinking debt market does not bode well for companies which require vast sums of cash to cover their perpetual business losses, especially sine these are debts they cannot currently repay. A shrinking debt market also does not bode well for the large FAANG companies who profit greatly from highly indebted cash-flow negative startups that spend almost 40 cents of every dollar on ‘advertising spend’. It’s like a game of musical chairs with a little less debt available when the music stops every month. Eventually someone will be left without a chair.

  19. Iamafan
    Dec 24, 2018 at 1:17 pm

    The 2Y and 26week just auctioned lower than they did the last time. The 2Y less than 6 months ago (June). So this speaks volumes of the cooling down. The plus side is at least it isn’t negative.

  20. EEngineer
    Dec 24, 2018 at 1:28 pm

    Did you hear anyone cry out “turn those machines back on” at the close today?

    Woof. My best day of the year!

    • Dec 25, 2018 at 11:53 am

      It was an early close, but apparently they have a bylaw which says they can close early (if they feel like it) on a holiday. There was a huge surge of selling at the close, I know it caught me unaware. I might easily have been in a trade. Apparently it was sparked by Mnuchin’s comments to the banks, and some ref to the PWGFM, which was the bailout mechanism in 87 that later became a fixture, but there is no liquidity problem here, no circuit breakers, no busted trades, its just political hacks scrambling for their lives.

  21. OutLookingIn
    Dec 24, 2018 at 1:53 pm

    FUNDAMENTALS.

    The ‘fundies’ have been telling and showing me what is occurring now, over a year ago. Those of you who are WS regulars, know my posts have not been market positive over these past few years. Pay attention to the fundamentals. They ALWAYS flash warning signs and communicate where the breakage will first appear.

    I sincerely hope that most have taken steps to financially protect their wealth, during the currently unfolding blood letting.
    Wishing ALL a very Merry Christmas and safe healthy New Year.

  22. Atu
    Dec 24, 2018 at 1:58 pm
  23. Dave K.
    Dec 24, 2018 at 6:32 pm

    Wolf-
    Merry Christmas! Really enjoy reading your work. This sounds like 2000 again.
    Gotta have big upswings followed by big downturns to those in the know can hit it out of the park every few years, while everyone else gets stuck out of the batters box.

  24. Aussie
    Dec 24, 2018 at 6:42 pm

    Thank you for this report. Have a great festive season Wolf!

  25. normansdog
    Dec 24, 2018 at 7:09 pm

    Has anyone noticed the remarkable similarity between Wolf’s voice and that of the wonderfully evil Peter Lorre? If there is a remake of the Maltese Falcon then Wolf is a shoe in for Joel Cairo.

    N. Dog.

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