"Enjoy it while it lasts"
-Sir Alan Greenspan, June 13, 2007,after suggesting
"the global liquidity boom, which he dates back to the end of the Cold
War, is nearing its end."
"The fragile five" appears with rising frequency in the financial
columns. This warning to stand aside, much as the "Asian contagion,"
in 1997, is bound to boomerang on Wall Street since Wall Street will keep
selling as long as demand exists. At that time, U.S. investment banks were
distributing sub-prime, Thai auto-loan securitizations to Greenwich. The hedge
funds leveraged such securities into a Fed-led, Wall Street bailout in October
1998. The question of whether the Long-Term Capital Management (LTCM) rescue
party should be considered a bailout was answered conclusively in Alan
Greenspan's Age of Turbulence scrapbook: "[A]n orderly liquidation
of [LTCM] was by no stretch of the imagination a bailout." Greenspan's
assertions of blamelessness when he is guilty-as-charged are the foundation for
his fortune.
He has also profited
handsomely from being wrong. This may seem a strange causality, and, in fact, a
distinction should be made. Greenspan has been wrong because his public
statements have already been vetted and approved by every hack, Wall Street
economist. "Wall Street economist," is a shorthand substitute for
myriad establishment totems who earn their living by saying what the majority
wants to believe.
This makes the
bewilderment of the Bernanke Fed in June 2007 all the more, er, bewildering.
("The 'expected impact from weaker housing...may flare in the future,
today - in the words of Ben Bernanke - it is contained.'" - July 18 2007,
MarketWatch)
In January 2014, Simple Ben is about to leave us, no wiser after seven more
years as Federal Reserve chairman. Sounding more askew than ever at his
December 18, 2013, press conference, the future civil-service pension recipient
spoke as directly and honestly as we have come to expect: "[T]here are
concerns about effects on asset prices, although I would have to say that's
another thing that future monetary economists will want to be looking at very
carefully."
The fragile five - Brazil, India, Indonesia, South Africa, and Turkey - are
suffering from investment outflows. As risk trades head home (to the Upper East
Side and Mayfair), possible contagion through U.S. markets rivals the startling
array of market upheavals that were widely expected on June 13, 2007.
A bucket filled with reports of doomed credit excesses sits beside this desk.
To condense, and also to offer ammo when the academic bureaucrats sit before
Senate panels and mumble "We had no warning," I follow with newspaper
articles by a single newspaper, the Financial Times, and by a single
reporter, Tracy Alloway. The pre-2007 activities were described in Panderer
to Power with a similar intent: to show anyone with even a nodding
acquaintance with credit and leverage the credit bubble was doomed, long before
2007. By 2004 (in fact, much earlier), the collapse of Fannie Mae, the
corruption of mortgage lending, the criminal actions that inflated the credit
bubble, were already obvious (and footnoted in Panderer to Power,
for any ambitious district attorney.)
In the December 11,
2013, Financial Times, Tracy Alloway warned: "The global search for
yield has spurred some of the loosest lending conditions in credit markets
since before the crisis, the Bank for International Settlements has
warned." The BIS, the central banker's central bank, also issued a barrage
of warnings before 2007. On December 14, Alloway was again on her soapbox:
"Central banks have flooded the financial system with cash, driving
investors to park their money in higher-yielding securities and largely
obfuscating the true state of underlying markets." She then referred to
the same BIS report: "In an era of cheap and easy money, investors are
encouraged to buy bonds from troubled companies and thereby suppress the
default rate." Who can forget: "House prices never go down?"
Once again, central bankers have laid 312,000 traps for unsuspecting grannies
who were enticed from their interest-bearing (roughly: 0.4%) CD or passbook
savings account because they had to eat.
"Surge in Boom-Era Debt is Signal for Overheating," was the title of
an October 19, 2013, Alloway scolding: "Five years of the Federal
Reserve's ultra-low interest rates have made the market for loans to highly
indebted companies white-hot in recent years as investors clamour for the
higher yielding assets and corpora[tions] rush to finance old debt." Here
we see the consequence of low rates to both investors and to investment-grade,
corporate bond issuers. Businesses run for-profit are losing sales to failed
competitors [sic] kept in motion by Ben Bernanke's nationalization decisions.
Kicking off the new year (January 1) Alloway's title prophesized: "2014
Outlook: Sugar High." She reported from a tea at the New York Athletic
Club where "waiters bearing trays of cookies fanned out among the bankers
and investors," as Leonard Tannenbaum, chief executive of Fifth Street
Management sounded like Tracy Alloway: "I believe there's another cycle
coming. So have a cookie. I want you to enjoy the sugar high - while it
lasts."
The columnist, along
with co-author Michael Mackenzie, picked up where Tannenbaum left off:
"Issuance of syndicated leveraged loans - those made to companies that
already carry high debt loads - reached $535.2 billion in 2013. That is just
shy of the $604.2billion sold in 2007, at the height of the last credit bubble.
Meanwhile, loans that come with fewer protections for lenders, known as "covenant-lite,"
accounted for almost 60 per cent of loans sold in 2013, compared with a 25 per
cent share in 2007. Sales of "payment-in-kind" notes, which give
borrowers an option to repay lenders with more debt reached $11.5 billion in
2012 [2013? - FJS] - a post-crisis high."
The Alloway &
Mackenzie team quoted Russ Koesterich, chief investment strategist at
BlackRock: "There are no bargains in fixed income. [Not true. There are
pockets of mispriced bonds, probably too small for BlackRock. - FJS] We have
seen a return to a lot of the practices that made people nervous in 2007 such
as PIKs and cov-lite." Alloway & Mackenzie went on to write
"'junk,' or high-yield, bonds
surged to a record in 2013 as companies rushed to refinance and
investors snapped up the resulting assets. Issuance of junk bonds rated 'triple
C' - the lowest designation - jumped to $15.3 billion, surpassing the
pre-crisis peak."
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