The monetary plumbers keep banging money market rates to zero, thereby ignoring what the money market rate really is in a financialized, debt-ridden system: the price of hot money, the single most important price in all of capitalism.
Even while the googly-eyed mainstream media celebrate the Dow’s record high, beneath the gloss, thousands of stocks are getting gutted. And the carnage is spreading.
We don’t know what hedge fund manager Steven Cohen will do with the money he borrowed from Goldman Sachs. We don’t even know how much it is, though it’s a lot; the personal loan is backed by his $1 billion art collection. But we know how he’ll use it: cheap leverage.
New regulations force banks to get rid of CLOs. They’re similar to subprime-mortgage-backed CDOs that blew up in 2008. But CLOs are backed by junk corporate loans, including malodorous “leveraged loans.” And they’re booming again. So the banks made a deal.
For years, nothing could slow the tsunami of junk debt. But suddenly, something happened, and investors in leveraged-loan mutual funds, where the crappiest junk debt accumulates, ran scared and started pulling their money out. Consequences were immediate.
It happened in 2000 and in 2007. With spectacular consequences. Now, it happened again. And hidden beneath the blue-chip highs, parts of the market are already crashing.
By now, this wondrous bull market constantly gets benchmarked against the dotcom bubble. It’s different this time, we’re told, even on NPR. But the wholesale destruction of financial assets has already started, one pocket at a time.
Q1 GDP growth is trending at a tepid 1.5%. But don’t worry. It’s the weather! Wall Street is predicting “escape velocity” for the fifth spring-summer in a row. Why? Because it’s already priced into the stock market!
For a while, rumor had it that banks weren’t lending, and that this was the reason the recovery has been so crummy. There was no demand for loans, and banks were too tight with their lending standards. Or so the story went.
Yield investors, driven to insanity by the Fed’s interest-rate repression, hold their noses and close their eyes to scrape up even the crappiest paper just to get a little extra yield. “On the way in, there’s insatiable demand.” Alas, “it’s going to be a disaster on the way out.”