Friday, March 30, 2012

Happy Friday! The Public Gets Tee'd Up For Slaughter - Again...

"It's the only place I can find any yield whatsoever with a reasonable risk," said Lee Hevner, an individual investor who said he started buying junk bonds this year for the first time.
Those will be famous last words.  That poor sot allowed his ignorant, greedy investment advisor talk him into putting 15% of $500k stash in junk bonds.  Hope he can afford to lose most of it.

Once again, courtesy of the Fed's zero interest rate policy (ZIRP) and the Government's catastrophic fiscal policies, the yield-starved individual investor has been flooding the high yield market with money in a desperate search for investment yields that have any shot at keeping up with the true cost of living.
Investors of all stripes have been diving into junk. Many of them are searching for investments that yield more than the meager rates offered by Treasuries and investment-grade corporate bonds. They are flooding into high-yield mutual funds and exchange-traded funds, market data show.
That quote is from this article from today's Wall St. Journal titled, "Junk Bonds Feed A Hungry Market."  Here's the LINK.  This desperate quest for more investment income has triggered a big wave of money flows in high yield bond funds and ETF's, which in turn has led to a huge issuance of new high yield bond deals.

Take it from a 9-year sell-side institutional junk bond market trader, the 7% average yield paid on junk bonds is not even close to being enough compensation for the enormous amount of credit risk embedded in the typical junk bond-issuing company.  Moreover, a lot of these deals are done in order to "dividend" money out of the company and into the pocket of the "sponsoring" private equity/leverage buyout firm which owns the company.  It's a way for the sponsor fund (like KKR or Bain Capital) to cash out on a big portion of the up-front equity capital used to engineer the buyout.  Trust me, it's not a good deal for junk bond investors.

In addition, the big Wall Street firms who underwrite and sell these deals take out enormous fees.  And the junk bond mutual fund money managers and pension fund managers get paid a lot money of "manage" this money.  On a risk/return basis, high yield bonds are a terrible risk for the individual investor, even to the extent that the individual's money is being put in a "diversified" fund of junk bonds.

And think about this:  for how much longer does anyone really believe that the Fed can engineer historically record low interest rates?   We know the economy is falling off of a cliff again.  So even if the recent default history in the high yield market has decreased, as the economy tanks many of these companies will run into a brick wall.  A spiking default rate combined with rapidly rising interest rates -this will happen as more money flees the dollar and a much higher yield is required to induce investors to buy the ever-increasing rate of U.S. Treasury debt issuance - will cause high yield bond prices to plummet.  If you have a 20% decline in the value of your high yield mutual fund, this will annihilate the 7% yield it currently throws off.  

In other words, the individual investor - forced into blindly grasping for current investment income - is being set up once again by the financial elitists and corrupt bankers to get slaughtered.  It's really just another mechanism for those on Wall Street to confiscate middle class wealth. 

It brings to mind the famous Will Rogers quote about being more concerned with the return OF his money than the return ON his money.  Those who understand the necessity of moving fiat currency based investments into physical gold and silver do not have to be concerned about either.

Have a great weekend!  Hope springs eternal as baseball season starts next week and every fan out there - including me - has renewed hope that their team will reach the World Series....


  1. Not true for Cubs fans--the record draught will continue.

    Although my ray of "hope" for Cubs is bittersweet--I know they will go to World Series the week everything collapses.

  2. Wonder how many deals would have been completed by the extractors if real interest rates reflected reality? Stick this into a valuation model...

    Gold Price Manipulation: Bullion, Gold Stocks Undervalued - Report

    "This close correlation among gold, interest rates, and government bond values is why central banks long have tried to control -- usually suppress -- the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power," Powell said.

    "As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it," Powell added. "Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government."

  3. Jim Grant Crucifies The Fed; Explains Why A Gold Standard Is The Best Option

    You say you would like to hear my complaints, and, on the one hand, I do have a few, while on the other, I can’t help but feel slightly hypocritical in dressing you down. What passes for sound doctrine in 21st-century central banking—so-called financial repression, interest-rate manipulation, stock-price levitation and money printing under the frosted-glass term “quantitative easing”—presents us at Grant’s with a nearly endless supply of good copy. Our symbiotic relationship with the Fed resembles that of Fox News with the Obama administration, or—in an earlier era—that of the Chicago Tribune with the Purple Gang. Grant’s needs the Fed even if the Fed doesn’t need Grant’s.

    In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body “to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes.” By now can we identify the operative phrase? Of course: “for other purposes.”

    The projected notes of the Federal Reserve would—of course—be convertible into gold on demand at the fixed statutory rate of $20.67 per ounce. But more stood behind the notes than gold. They would be collateralized, as well, by sound commercial assets, by the issuing member bank and—a point to which I will return— by the so-called double liability of the issuing bank’s stockholders. be nice if they brought back that last sentence...see how many fugazy deals get done then!

  4. Ex-Longmont resident says "Go Rockies!"

  5. Hey Dave, Saw you got some love in Paul Mylchreest's 57 page manipulation epistle. What did you think of it? Thumbs up from me


    1. Thanks for the heads up. Thunder Road is on my weekend reading list. Mylchreest does great work.

  6. Speaking of slaughter, I just read that Goldman-Sachs is recommending buying gold in the short run but that it is not a good long term investment. That tells me that they are likely shorting gold and want their clients to buy in so they can fleece them in the short run. With the fundamentals the way they are who could say that gold is not a good long-term investment but someone who was planning to make money off their clients in the short run?? Get them to buy in and panic and sell when you force the price down temporarily. Well played Goldman!!
    Me thinks I have learned a lot of good critical thinking from this blog. Thanks Dave!!
    Justin from Canada

  7. Once again Dave great commentary and top notch analysis.

    We are not worthy.

  8. Excellent post Dave! If I am a Muppet, its not because I purchased bonds!

  9. From a reliable source:

    “Congress has included an item in the Highway Funding Bill S. 1813 – a provision that allows the IRS to order the State Department to revoke a US citizen’s passport if it is believed – not proven – that said taxpayer owes more than $50,000 in back taxes.”

    anti capital flight mechanism?

  10. Market rigging gets too obvious even for Bill Buckler and Jim Grant

    Buckler writes: "It is interesting that many of the same people who are now abandoning stock markets because of their 'volatility' over the last few years are the same people who become affronted at the slightest mention of the possibility of precious metals price manipulation. A moment's serious contemplation should make things clear. The precious metals and gold in particular have always been the 'alternative' to government promise based on and created out of thin-air money. As such, the precious metals have always been Public Enemy No. 1 as far as the money manipulators are concerned. Anyone who aspires to intervention in an economy and the political power that it gives is and always has been an enemy of gold. As long as there is a central bank manipulating money and interest rates, all markets are manipulated by definition. To imagine that the precious metals would be overlooked is ridiculous."

    The same with Jim Grant, publisher of the Grant's Interest Rate Observer letter and perhaps the only gold advocate with enough respectability to be frequently invited to speak at respectable forums, like CNBC. Grant may have remained this respectable by refraining from too much pointed criticism of the financial powers.

    But interviewed this week on CNBC by Maria Bartiromo, Grant got very pointed indeed. The Federal Reserve, Grant said, "is in the anti-capitalism business. ... The Fed ought to get out of the manipulation business. ... They ought to forswear the intervention in markets." Grant strongly implied, for what may have been the first time, that among the markets being manipulated and intervened against is the gold market. The interview is six minutes long and it's posted at CNBC here:

  11. I guess Greg Smith was right...

    Financiers and Sex Trafficking

    The two biggest owners are Jim Larkin and Michael Lacey, the managers of the company, and they seem to own about half of the shares. The best known of the other owners is Goldman Sachs, which invested in the company in 2000 (before Backpage became a part of Village Voice Media in a 2006 merger).

    A Goldman managing director, Scott L. Lebovitz, sat on the Village Voice Media board for many years. Goldman says he stepped down in early 2010.

    Let’s be clear: this is a tiny investment by a huge company, and I have no reason to think that Goldman’s top executives knew of its connection to sex trafficking. Goldman prides itself on its work on gender: its 10,000 Women initiative does splendid work supporting women in business around the globe. Full disclosure: Goldman’s foundation was one of about 15 funders of a public television documentary version of a book that my wife and I wrote about the world’s women.

    That said, for more than six years Goldman has held a significant stake in a company notorious for ties to sex trafficking, and it sat on the company’s board for four of those years. There’s no indication that Goldman or anyone else ever used its ownership to urge Village Voice Media to drop escort ads or verify ages. Elizabeth L. McDougall, chief counsel for Village Voice Media, told me Friday that she was “unaware of any dissent” from owners.

    There are no easy solutions to sex trafficking. I think the most important single step is for prosecutors to focus more on pimps and johns. Closing down the leading Web site used by traffickers would complicate their lives, and after so many years of girls being trafficked on this site, it’s time to hold owners accountable.

    Ignorantia juris non excusat

  12. Why Are the Fed and SEC Keeping Wall Street’s Secrets?

    But let’s not pretend that the Fed’s carefully scripted, and untimely, release of a disk of public information to me is even remotely the way FOIA is supposed to work. Where are the documents and e-mails about how Goldman was allowed by the Fed to become a bank holding company? Where are the documents from the SEC about Goldman? Where, for that matter, are the SEC documents related to the short-dated, out-of-the-money puts that investors spent millions of dollars buying in the last week of Bear Stearns’s existence? The SEC said it was investigating who bought and sold these puts, but it has never made the results of its investigation public despite my FOIA request.

    If our government agencies continue to do everything in their considerable power to keep hidden information that belongs in the public realm, all the regulatory reform in the world won’t end the rot on Wall Street.

    Greenspan defends Bernanke over attacks

    High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email to buy additional rights.

    Mr Greenspan has sharply chastised the presidential hopefuls for their verbal barrages against his successor. “Anyone has the right to criticise Federal Reserve policy, but it is wholly inappropriate and destructive to engage in ad hominem attacks,” Mr Greenspan told the Financial Times, adding that he had been “very much impressed with the depth of his [Mr Bernanke’s] skills” during the three years they worked together.

    “Moreover, the notion that Fed board members, once appointed, can be ‘fired’ by the president for their ‘policy views’ is inaccurate. Policy views are explicitly protected by statute,” he said.

  13. 'Sell Gold!' They Say…

    The idea that gold is 'too popular among the masses' meanwhile is risible. As you will see further below, the overall bullish consensus on gold has just hit the lowest point in a decade. Moreover, the 'masses' have certainly not bought gold at all – on the contrary, they have sold theirs to slightly dubious outfits like 'Cash-4-Gold'. In fact, of the entire universe of financial assets in the whole world, only between 0.2% to 0.8% (depending on whose estimates one believes) are currently represented by investments in gold and gold-related assets. That's just slightly above 'nothing'.

  14. Geithner Wants To Get Rid of Physical Currency (Better Tracking)

    Timothy Geithner, the Secretary of the Treasury, wants to get rid of paper money. He says it’s part of a cost-cutting measure.

    Nonsense. It’s part of the government’s attempt to track our purchases. Its a plan to get rid of the underground economy, where people buy what they want, sell what they want, and leave no digital trail.

    The government cannot control the cash markets. It wants to tax them. But paper money resists taxation.

    Render to Caesar the things that are Caesar's?

    and how about this for modern day coin clipping?

    Treasury to Cut Costs by Remaking Coins, Replacing Paper

    Changing the makeup of coins and improving the efficiency of currency production will save more than $75 million in the next fiscal year. In addition, the suspension of presidential dollar coin production, announced in December, will save another $50 million.

  15. And why would interest rates rise?

    The Fed and other central counterfeiters have a nice circular game going: Treasury issuance to Primary Dealers to Fed...round and round and round.

    A perpetual motion funding machine!

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