Economic Crash of 2020: The Fuckening

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Re: Economic Crash of 2020: The Fuckening

Postby SonicG » Tue Jun 16, 2020 6:50 am

Huhmmm...besides finding my new rap name "iBoxx $"...Well, I had to look some stuff up. This is informative about ETFs and what the Fed did in May:
Specifically, as part of the stimulus effort to counteract the effects of the coronavirus lockdowns, the Treasury gave the Fed $75 billion, which the Fed will in turn leverage 10-to-1 to buy $750 billion in corporate debt. Some of that figure will be in the form of corporate bond ETFs and even junk bond funds.
In a lot of ways, this is no big deal; it's essentially just the next logical progression of the Fed's traditional open-market operations.
But in a few critical ways, this really is a major policy shift – one that potentially makes a major weakness in the bond ETF space even more dangerous.

Why Is the Fed Buying ETFs?
The answer here is pretty simple. The Fed essentially has the same issue that other passive indexers do. They're looking to get exposure to the corporate bond market as a whole, but not necessarily to any single company. The Fed isn't a bond fund manager. Nor does it have the interest or the inclination to research the credit worthiness of individual bond issuers.

Furthermore, there's a political element. The Fed needs to maintain its image of neutrality and can't be seen as favoring individual companies. The last thing Fed Chair Jerome Powell needs is to face a congressional firing squad over his decision to buy – or not buy – the bonds of a controversial or politically incorrect company.
Buying passive bond index ETFs – and having BlackRock (BLK) manage the endeavor – extricates the Fed from that situation.
- - - -
Why Is This Bad?
"Bond ETFs create a false sense of liquidity," says Mario Randholm of Randholm & Co., a money manager with clients in Europe and South America. "The ETFs themselves are extremely liquid and even trade on the NYSE and other major exchanges. But the bonds they own are not. Liquidity in the ETF is not the same thing as (liquidity in the underlying bonds)."

Exchange-traded funds are an attractive vehicle because you can create and destroy shares as demand warrants. When there is more demand for an ETF than current inventory can support, large institutional investors create new shares by buying up the underlying holdings and bundling them into new creation units. When demand for the ETF falls, the institutional investors can break apart shares of the ETFs and sell the underlying holdings.
How is the Fed going to unwind three quarters of a trillion dollars in corporate bonds? How could they unload these bond ETFs without crushing bond prices? No one knows, and that's exactly the problem. The Fed is about to become the largest lender to corporate America, and unwinding this might be impossible.

-------

What Does This Mean for Stocks?

In the capital markets, a rising tide lifts all boats. By hoovering up hundreds of billions of dollars in bonds, the Fed is essentially freeing up capital that will have nowhere else to go but to the stock market.

This isn't news, of course. The Fed's interventions and the promises of more interventions are the primary reason that the stock market has been on fire since late March.

It remains to be seen how far this trend goes. The Fed's interventions were a major driver of the 2009-20 bull market. Some would argue they were the biggest driver, in fact.

And as a general rule, it's a bad idea to fight the Fed. It has a bigger wallet than you.

https://www.kiplinger.com/article/inves ... -what.html


Given the bold u/l part in the above article and the move to start "hoovering up" individual bonds mentioned in the recent move:

The central bank also spelled out for the first time how it plans to implement its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility. The Fed built the index internally, and a spokesman couldn’t immediately say whether its details would be made public.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

The creation of the index removed a potential hurdle for companies that would have had to certify that they were in compliance with restrictions outlined for the program.


The Fed is blowing up a massive gold balloon with lungs of paper?
"a poiminint tidal wave in a notion of dynamite"
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Re: Economic Crash of 2020: The Fuckening

Postby Wombaticus Rex » Tue Jun 16, 2020 10:39 am

Yeah, and like REITs and tranched CDOs, there is a bottleneck function that's built in: when it's time to rush for the exits, most players will be fucked, and most especially the players who just started joining.

I've had the same conversation about a dozen times in the past month, whereby someone asks me to explain what's going on in the markets, I do so, and they'll come back in the span of somewhere between an hour and a week and ask 1) how they get can in on this Free Fed Money and 2) what they should invest in. I tell them they're going to get fucked and then proceed to give them some free rope. I don't feel great about it but I do believe in both human agency and our capacity for learning face-first.

The scale of what's going on right now is truly incredible shit; the disconnect between what's going on and what's being published is what's really scary, though.
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Re: Economic Crash of 2020: The Fuckening

Postby Elvis » Tue Jun 16, 2020 6:41 pm

Recommend this series (I haven't read all of it yet):

The Federal Reserve's Coronavirus Crisis Actions, Explained
Nathan Tankus

https://nathantankus.substack.com/p/the ... avirus-468


The earlier posts in the series are linked.
"Frankly, I don't think it's a good idea but the sums proposed are enormous."
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Re: Economic Crash of 2020: The Fuckening

Postby semper occultus » Tue Jun 16, 2020 7:31 pm

Bankrupt Hertz files to sell shares that could be 'worthless'

Potential investors in Hertz Global Holdings Inc.s’ share offering can’t say they haven’t been warned.

https://www.msn.com/en-us/money/topstocks/bankrupt-hertz-files-to-sell-shares-that-could-be-worthless/ar-BB15vTzp

In fact, the word “worthless” appears five times in Hertz’s (HTZ) Monday filing to sell up to $500 million worth of shares, always in connection with the car-rental company’s stock. The U.S. Securities and Exchange Commission filing, studded with other dire warnings, was also notable for what it didn’t have: Any details about a reorganization plan.

Investors were surprised last week when Hertz asked a bankruptcy court to issue stock, and perhaps more surprised when the court late Friday agreed to let the deal go forward.
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Re: Economic Crash of 2020: The Fuckening

Postby Grizzly » Thu Jun 18, 2020 4:33 am

Kudlow says extra $600 for unemployment benefits will end in July
https://www.marketplace.org/2020/06/15/extra-600-unemployment-benefits-kudlow-trump-administration-congress/

Bonus,
https://confoundedinterest.net/2020/06/16/fear-the-walking-dead-corporations-zombie-firms-now-18-9-of-all-firms/

Another example of the damage done by government shutdowns over the COVID-19 “epidemic.” The percentage of firms that are zombies is now at 18.9%.

“Zombies” are firms whose debt servicing costs are higher than their profits but are kept alive by relentless borrowing, according to Axios.
If Barthes can forgive me, “What the public wants is the image of passion Justice, not passion Justice itself.”
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Re: Economic Crash of 2020: The Fuckening

Postby Elvis » Wed Jul 01, 2020 5:36 pm

Links at original.

https://jacobinmag.com/2020/06/jay-clay ... sion-trump


SEC Regulators: Private Equity Is on a Crime Spree

By David Sirota

Securities and Exchange Commission regulators recently issued a scathing report that reads like a last-ditch plea for help in reeling in private equity billionaires, who have all but free rein to fleece whoever they want, whenever they want.

In 2017, Donald Trump appointed private-equity lawyer Jay Clayton as the chairman of the Securities and Exchange Commission (SEC), one of the agencies that is responsible for policing the financial industry. Soon after getting the job — and only a few years after the SEC fined major private equity firms for bilking investors — Clayton was pushing to change federal law to let asset managers funnel more money from retirees to those high-risk, high-fee firms.

Clayton finally got his way last week when the Trump administration issued a letter letting 401(k) plans move the savings of 100 million workers and retirees to private equity billionaires, some of whom have been among big donors to Donald Trump’s political machine. Clayton publicly celebrated the change, insisting it “will provide our long-term Main Street investors with a choice of professionally managed funds” that would benefit workers and retirees.

But in a stunning move yesterday, Clayton’s law enforcement agency effectively blew the whistle on its own chairman, issuing a scathing report documenting a private equity crime spree that is fleecing pension funds, university endowments, and other investors.

The timing of the alarm is particularly important. The SEC’s report reads like career regulators’ last-ditch plea for help at the very moment they see private equity billionaires on the verge of creating a lawless autonomous zone for themselves.

In a little-noticed ruling last week, the Supreme Court restricted the SEC’s power to punish private equity firms. With the agency successfully neutered, Trump is now trying to move Clayton into the job of US Attorney, overseeing Wall Street.

If his nomination is confirmed by the Senate, Clayton would be positioned to defang the prosecutors who are the last line of law-enforcement defense against the very private equity wrongdoing that SEC regulators are now frantically trying to blow the whistle on.

“Expenses That Were Not Permitted”

Private equity firms are notorious for looting companies and torching the environment, while charging investors huge fees in exchange for middling returns.

In 2014, a top SEC official warned that there were “violations of law or material weaknesses in controls” in more than half of the private equity firms the agency had examined. The SEC’s new Risk Alert expands on that discovery, summarizing findings from hundreds of the agency’s examinations of private equity firms. It reads like a scathing rap sheet documenting a culture of abuse, misconduct, and theft — and it obliterates Clayton’s recent claims that the investments are good for workers and retirees.

For example: amid recent headlines about the private equity industry charging investors $230 billion in fees, one section of the SEC document shines a spotlight on fee gouging. Regulators report that private equity firms have “failed to follow their own travel and entertainment expense policies, potentially resulting in investors overpaying for such expenses.” The SEC also notes that firms are charging “clients for expenses that were not permitted” or not properly disclosed — including expenses for lavish annual investor meetings.

In practice, such fees and expenses are being paid for out of the money entrusted to private equity firms by investors such as pension funds, university endowments, and charities.

Similarly, SEC regulators seemed to bolster long-standing allegations that private equity firms mislead investors about the value of their assets. The agency reported finding private equity firms “that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients.”

The agency notes that in some cases, fraudulent valuations “led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.”

“As A Result, Some Investors Were Unaware of the Potential Harm”

In recent years, critics have asserted that private equity firms secretly give preferential treatment to certain politically connected investors — preferences that are paid for by exorbitant fees and abusive terms imposed on “dumb money” investors like pension funds.

The SEC appears to confirm these allegations.

“The staff observed private fund advisers that preferentially allocated limited investment opportunities to new clients, higher fee-paying clients, or proprietary accounts or proprietary-controlled clients, thereby depriving certain investors of limited investment opportunities without adequate disclosure,” the agency wrote. “The staff observed private fund advisers that did not provide adequate disclosure about economic relationships between themselves and select investors or clients.”

One example of particularly predatory terms that critics cite are provisions that could let preferred investors bail out early on failing investments, leaving the other investors, like pension funds, with all the losses. Again, the SEC confirms that this is happening.

“The staff observed private fund advisers that entered into agreements with select investors that established special terms, including preferential liquidity terms, but did not provide adequate disclosure,” the agency wrote. “As a result, some investors were unaware of the potential harm that could be caused by selected investors redeeming their investments ahead of other investors, particularly in times of market dislocation where there is a greater likelihood of a financial impact.”

A Private Equity Takeover

In 2016, a group of Rhode Island retirees requested federal law-enforcement action to investigate whether special preferences were harming their state’s pension fund. To date, that request has gone unanswered — and moves by the Supreme Court and Trump suggest they will remain unanswered.

The high court last week limited government regulators’ power to punish financial firms that rip off investors. While the ruling preserved the Securities and Exchange Commission’s power to order companies to return ill-gotten gains from illegal schemes, it limits the size of those financial punishments in order to make sure they don’t end up being a “punitive sanction” — the kind that is designed to deter crime.

If Trump now successfully installs Clayton as US Attorney for the Southern District of New York, Clayton would be able to make sure there is no investigation or prosecution of the private equity industry that he worked with as a Wall Street attorney, that he personally invested in, and that is helping bankroll Trump’s reelection.

It would be the culmination of the private equity industry’s takeover of the federal law-enforcement system — at precisely the moment regulators are desperately trying to warn America about the industry’s crimes.

"Frankly, I don't think it's a good idea but the sums proposed are enormous."
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