Stanley Druckenmiller, the justly renowned investor, spoke at the Delivering
Alpha conference on Wednesday, July 16, 2014. Quoting Druckenmiller: "As a
macro investor, my job for 30 years was to anticipate changes in the economic
trends that were not expected by others - and therefore not yet reflected in securities
prices. I certainly made my share of mistakes over the years, but I was
fortunate enough to make outsized gains a number of times when we had different
views from various central banks."
Druckenmiller went on to discuss, among much else that deserves reading, how
the Fed's emergency 1.0% fed funds rate in 2003-2004 defied conditions observed
by him and his colleagues at Duquesne Capital. Where was the emergency? In
short: "[W]e were confident the Fed was making a mistake, but we were much
less confident in how it would manifest itself. However, our assessment by
mid-2005 that the Fed was fueling an unsustainable housing Bubble, with dire
repercussions for the greater economy, allowed our investors to profit
handsomely as the financial crisis unfolded."
Today, Federal Reserve Chairman Janet Yellen sounds more preposterous every
time she opens her mouth. Last week, maybe it was two weeks ago, she offered
America a sector analysis, proposing that small-cap and biotech stocks look
overpriced. A few days later, ECB President Mario Draghi offered his opinion of
no widespread asset bubbles, although some markets looked "frothy."
It has been less than a decade since Fed chairman Greenspan declared there was
no housing bubble, though he saw signs of "froth." His weasel act
warranted derision, which is just what it received, such as in the Economist's
headline: "Frenzied Froth" (May 28, 2005). Draghi is acclaimed for
his well-tailored suits but they stink of old mothballs. He's a botoxed
Greenspan.
The two of them - that would be Yellen and Draghi - have decided to let markets
take their course, now that the Fed and ECB have used every possible mechanism
to create mispricings in all markets. They will administer regulatory measures,
if necessary.
The only such declaration of any use would be to administer the two of them,
along with their supercilious staffs, out of existence. Instead, the average
person who reads newspapers that include even a moderate degree of financial
reporting knows multiple crashes are building.
The all-star break results are in. That is, the
announcements of how first-half 2014 security issues compare to earlier years.
We can congratulate ourselves. Never before has the world shown such
indulgence, intemperateness, and unconscionable underwriting as in 2014.
"Megadeals... helped push the number of debt sales
by highly rated companies in the U.S. to record levels in the first half of the
year. These companies sold about $642 billion of debt." That
"outstrips the previous record set in 2009, when $612 billion of bonds was
sold..." (Wall Street Journal, July 1, 2014) Aside from the
probable default rate (where are you now, TXU?), megadeals are no friend to the
workers.
"As investors scour the landscape for income, the first
half of the year saw record amounts of new corporate bond issuance as well as
record issuance of collateralized loan obligations. CLOs are securitized
vehicles that invest in bank loans made to junk-rated companies, first pooling
the loans and then dividing them into tranches to be sold to investors at
varying levels of income and risk.... The $58 billion of CLO issuance in the
first half of this year puts 2014 on pace to top $100 billion and break the
previous single-year issuance record...set in 2007." (Wall Street
Journal, July 2, 2014) Pension plans and insurance companies are large
buyers of such attempts to increase yield; an attempt to reinstitute the yield
confiscated by the same central banks that have now declared their forbearance
in monitoring default-prone issues.
Doug Noland, manager of the Prudent Bear Fund, in his Credit
Bubble Bulletin, written on July 11, 2014, analyzed the seven-year
itch, under the appropriate title: "2014 vs. 2007":
"From my perspective, 2014 and 2007 share troubling
similarities. Both periods feature overheated securities markets, replete with
the rapid issuance of securities at inflated valuations. Both are characterized
by investor exuberance in the face of deteriorating fundamentals - and in both
cases central bank policymaking was fundamental to heavily distorted market
risk perceptions. It's no coincidence that today's overheated backdrop - record
securities issuance and meager risk premiums/record high prices - readily
garner statistical comparison to 2007.
"This year's booming M&A market has posted the
strongest activity since 2007. Second quarter global M&A volume of $1.06
trillion was up 72% from the year ago period. Here at home, M&A more than
doubled year-on-year to $473 billion, pushing record first-half volume to $749
billion. The proliferation of deals was fueled by the loosest credit conditions
in years. First-half global corporate bond issuance hit an all-time high $2.29
trillion. A record $286 billion of junk bonds were issued globally, as average
junk yields traded to the lowest level ever. At $642 billion, first-half U.S.
investment-grade company bond sales easily posted an all-time high. The first
six months of 2014 also saw record issuance of collateralized loan obligations
(CLOs). A record number of global IPOs were sold in the first half, with $90.6
billion of offerings 54% above comparable 2013. Led by technology and
biotechnology issues, U.S. IPO sales enjoyed the strongest first-half since the
height of the technology bubble back in 2000. According to Dealogic,
year-to-date total global sales of corporate stock and equity-linked securities
reached an unmatched $510 billion, outpacing 2007's record pace."
It is certain such frivolities are "not yet
reflected in securities prices."
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