This Is Crazy! Current Leveraged Recap Binge Is Clone Of 2007 Mania

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

This eruption of late cycle bubble finance hardly needs comment. Below are highlights from a Bloomberg Story detailing the recent surge of leveraged recaps by the big LBO operators. These maneuvers amount to piling more debt on already heavily leveraged companies, but not to fund Capex or new products, technology or process improvements that might give these debt mules an outside chance of survival over time.

No, the freshly borrowed cash from a leveraged recap often does not even leave the closing conference room - it just gets recycled out as a dividend to the LBO sponsors who otherwise hold a tiny sliver of equity at the bottom of the capital structure. This is financial strip-mining pure and simple - and is a by-product of the Fed’s insane repression of interest rates.

The ultra-junk paper which funds these leveraged recaps is bought for one reason alone: money managers are desperate for yield and as the cycle nears its peak, they simply close their eyes and buy bonds that have an overwhelming chance of default. They then comfort themselves with a wholly specious financial figure called the current default rate which presently happens to be running under 2%. It was also running under 2% in 2007 and in 1999 and in 1990!

Each time the Fed sponsored financial bubble eventually burst. Then junk bond prices cratered, yields soared and default rates reached double digits levels. In fact, we are now on the cusp of the fourth junk bond crash since 1989. Needless to say, these now well-choreographed cycles of boom and bust would not occur on the free market.

Money managers wouldn’t need to close their eyes and grasp for “yield”; they’d be able to find investment grade credits with a decent rate of return. The number of LBOs available to become host to leveraged recaps would be drastically smaller because market-set interest rates on junk bonds would be so high as to eliminate most of the upside captured by private equity speculators. The latter are not really equity investors at all—just speculators in what are essentially call options on the Fed’s predictable cycles of bubble finance and unsustainable economic rebound.

Ironically, the recent surge in corporate lending by banks is being cited by Wall Street’s perma-bulls as evidence that the long-awaited “escape velocity” is about to materialize. But most of the up-tick in corporate loans has been for leveraged lending—an exact repeat of 2005-2007. And that, alas, means that the bubble cycle is in its final innings—not that economic nirvana is about to break loose.

The highlights from today’s Bloomberg story on how “private equity firms are borrowing money to pay dividends like its  2007″ might well have been zeroxed from Chapter 24 of the Great Deformation, which is entitled “When Giant LBOs Strip-Minded the Land” and which analyses the same phenomena during the 2007 cycle as highlighted by Bloomberg below for this one—namely PIK bonds, leveraged recaps and the evaporation of credit standards in the form of so-called “cov-lite” debt issues.

The excerpt which follows, in fact, makes abundantly clear that this time is not different. Its actually completely the same.

By Matt Robinson and Sridhar Natarajan From Bloomberg News

“PE Firms’ Dividend ‘Epidemic’ Intensifies Junk-Debt Alarm”


Companies owned by private-equity firms are borrowing money to pay dividends like it’s 2007, adding to concern among regulators that excesses are emerging in the riskier parts of the debt markets.


Borrowers including Madison Dearborn Partners LLC’s mobile-phone insurer Asurion LLC obtained almost $21 billion in junk-rated loans this year to enrich their owners, the most in seven years, according to Standard & Poor’s Capital IQ LCD. Some of the least-creditworthy companies are even selling notes that may pay interest with more debt, which BMC Software Inc. did for its $750 million payout to a group led by Bain Capital LLC.


With defaults by the neediest U.S. borrowers approaching record lows, buyout firms are taking advantage of the Federal Reserve’s (FDTR) easy-money policies to extract payouts by piling more junk debt onto the companies they own….


“It’s kind of like an epidemic,” Martin Fridson, a New York-based money manager at Lehmann, Livian, Fridson Advisors LLC, who started his career as a corporate-debt trader in 1976, said in a telephone interview. “Once an investment banker sees that, he’s going to go to his clients and say, ‘Here’s a window of opportunity, you can take a dividend and get away with it.’”


The amount of loans used for dividend deals this year is exceeded only by the pace in the start of 2007, when $31 billion was procured, according to S&P LCD. Investors are searching for yields as average borrowing costs on investment-grade debentures of 3.15 percent compares with a 10-year average of 4.85 percent, Bank of America Merrill Lynch index data show.


The payout for the Bain-led ownership group was financed entirely with $750 million of debt known as payment-in-kind notes, which enables Houston-based BMC Software to pay interest with extra borrowings instead of cash. More than $3.5 billion of such notes have been raised in 2014, also the most in seven years.


Junk loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P. A record $1.1 trillion of the debt was issued last year, according to data compiled by Bloomberg.


Rather than refinancing at lower interest rates or to fund expansion, dividend loans offer private-equity firms a way to recoup their investment while increasing the debt burden of the companies they control.


“Dividends are an easy way for a private-equity firm to quickly and efficiently monetize their investment and lock in returns for their clients,” Frank Ossino, a Hartford, Connecticut-based money manager…. Bloomberg data show….Bain and other buyout firms extracted a dividend out of BMC Software seven months after buying the computer-network software maker in September.


Platinum Equity LLC, a Beverly Hills, California-based buyout firm raised a $262 million payment-in-kind bond to pay itself a dividend a week after closing on its takeover of a rental unit from Volvo AB in February.

Default rates on speculative-grade companies have fallen to 1.7 percent in the first quarter, the lowest level since February 2008, according to Moody’s. The credit rater expects that measure to rise to 2.4 percent by year-end, below the historical average of 4.5 percent….


“The banks and sponsors continue to push the envelope because of continued demand for yield-generating products,” Newfleet’s  Ossino said. “If someone’s willing to lend to a company, it’s difficult for borrowers not to accept the loan.”


Excerpt From The Great Deformation on the nearly identical  2007 explosion of PIK bonds, leveraged recaps and equity harvests by LBO sponsors. (pp. 502-508)


The wherewithal for financial engineering came from the leveraged loan market that had been on death’s door after “risk” went into hiding during the dot-com bust. But when the Fed caused interest rates to tumble to lows not seen for generations, the market for leveraged finance literally exploded.

Issuance of highly leveraged bank loans plus junk bonds leapt higher by $1 trillion annually, rising from $350 billion in 2002 to $1.35 trillion by 2007. Funding available for LBOs and leveraged recaps thus quadrupled. Alto- gether, a total of $4.5 trillion of so-called high-yielding debt was issued dur- ing this six-year interval. This astounding number exceeded all of the high-yield debt ever issued in all previous history.


Moreover, the surging quantity of available high-risk debt was only part of the story. The deterioration in quality was even more spectacular. The riskiness of leveraged loans is usually measured by the interest rate spread over LIBOR; the more risk the larger the spread. This LIBOR spread on leveraged bank loans, for example, dropped from 375 basis points to 175 basis points, meaning that compensation to lenders for the risk of loss posed by highly leveraged borrowers virtually disappeared.


Likewise, under a euphemism called “covenant lite” traditional borrower restrictions were essentially eliminated from junk bonds, transformingthem into financial mutants. Under standard bond covenants, company cash could not be paid out to common equity holders who stood at the bottom of the capital structure unless bonds were well covered. But under “covenant lite,” private equity sponsors could suck huge self-dealing cash dividends out of a company, bondholders be damned.


Implied default risk also increased sharply as measured by average deal multiples, which rose from 7X cash flow to nearly 11X. Moreover, near the end of this leveraged lending spree an increasing share of junk bonds were of the “toggle” variety. This meant that if the borrower came up short of cash it could just send the lender some more IOUs (bonds); that is, it could borrow to pay interest just like under “neg am” home mortgages.


The ultimate indicator of the drastic deterioration of loan quality during this period, however, was the eruption of leveraged “dividend recaps.” LBO companies were able to issue new debt on top of the prodigious amounts they already owed, yet not one penny of these new borrowings went to fund company operations or capital expenditures.


Instead, the newly borrowed cash drained right out of the bottom of the capital structure and was paid as a dividend to the LBO’s private equity sponsors. This sometimes permitted sponsors to recoup all of their initial capital or even book a profit within a few months of the initial buyout transaction, and long before any of the initial debt was paid down.


Leveraged dividend recaps during the second Greenspan bubble (2003– 2007) were off the charts relative to all prior experience. Thus, more than $100 billion was paid out during this period, compared to generally less than $1 billion annually in the late 1990s. Since private equity sponsors normally are entitled to a 20 percent share of profits, a couple of dozen buyout kings and their lesser principals pocketed $20 billion from these payouts.


The real trouble, however, was not so much the greed of it as it was the sheer recklessness of it. Most of these dividend recap deals were done by freshly minted LBOs, some of them so fresh, in fact, that they had hardly gotten to their first semiannual coupon payment.


So the feverishly overheated leveraged loan market was the real culprit. Investors were indiscriminately devouring any high-yield paper offered, and for the worst possible reason. As the 2003–2007 Greenspan bubble steadily inflated, fund managers became convinced that the monetary central planners at the Fed had truly achieved the Great Moderation; that is, recessions had more or less been banished.


While implausible it nevertheless caused a drastic mispricing of junk bonds. They carry a high yield owing to their embedded equity-type risks,the most important of which historically had been the sharp impairment of cash flows and rise of default rates triggered by business cycle downturns.


Now that the risk was attenuated or even eliminated entirely, high-yield bond managers started acting as though they owned a Treasury bond with a big fat bonus yield and commenced buying junk bonds hand over fist. The demand for new paper became so frenetic that Wall Street underwrit- ers virtually begged private equity sponsors to undertake “dividend recaps” so they would have product to sell to their customers.


This was another sign of the reckless speculation induced by the Fed’s bubble finance. During seventeen years in the private equity business, I never observed these firms reluctant to scalp a profit when, where, and as they could. But most firms believed the prudent strategy was to get a new LBO out of harm’s way as soon as possible by paying off debt and ratchet- ing down the initial leverage ratio. Rarely did sponsors think about piling on more debt in the initial stages, and certainly not to pay themselves a dividend. Even during the final red-hot years of the first Greenspan bubble (1997–2000), dividend recaps were rare, with volume averaging only $1.7 billion per year.


During the second Greenspan bubble, by contrast, annual volume soared to $25 billion. Junk bonds and leveraged loans were so cheap and plentiful and the overall financial euphoria so intense that even the great LBO houses succumbed to violating their own investing rules. In fact, $100 billion of dividend recaps on the backs of dozens of companies already groaning under huge debt loads was not just a violation of time-tested rules—it bordered on a derangement and madness of the crowds.


This eruption of leveraged dividend payouts dramatically exposed one channel by which cash from CEW was recycled to the top 1 percent. More importantly, however, it also laid bare the whole self-feeding web of bubble finance that the Fed’s monetary central planners unleashed while attempt- ing to levitate asset prices.


In this instance, the stock market bust of 2000–2001 and the modest eco- nomic slump which followed brought the excesses of leveraged finance to a screeching halt. Accordingly, the secondary market for high-yield debt cratered, new loan issuance slumped badly, and LBO activity stalled out at low ebb.


The financial market was attempting to heal itself for good reason. De- fault rates on leveraged loans soared from an average of 2 percent of out- standings during 1997–1999 to 10 percent during 2001–2002. These high default rates, in turn, sharply curtailed the investor appetites for junk bonds, causing new issues to drop by two-thirds between 1998 and it had been practiced during the late 1990s boom years when the cash flows of buyout companies had been drastically overleveraged.


Not for the last time, however, the Fed refused to permit the financial markets to complete their therapeutic work. When the federal funds rate was slashed to 1 percent by June 2003, the collateral effects on the junk bond market were electrifying, precisely the opposite of what the doctor ordered.


During the twenty-four-month period between mid-2002 and mid-2004, junk bond interest rates plunged from 10 percent to under 6 percent. Since bond prices move opposite to yield, the value of junk bonds soared and speculators made a killing on what had been deeply “distressed” debt. In- deed, in a matter of months, a class of securities that had been a default- plagued pariah became a red-hot performance leader.


This massive windfall to speculators was not the result of prescient in- sights about the future course of the US economy. Nor was it owing to any evident “bond picking” skill with respect to the performance prospects of the several hundred midsized companies which constituted the junk bond issuer universe at the time. Instead, junk bond speculators made billions during the miraculous recovery of leveraged debt markets during 2003– 2004 simply by placing a bet on the maestro’s plainly evident fear of disappointing Wall Street.


Wall Street underwriters, in turn, had no trouble peddling new issues of an asset class that was knocking the lights out. These gains were not all they were cracked up to be, of course, because junk bonds had not become one bit less risky (or more valuable) on an over-the-cycle basis. But the Fed’s interest rate repression campaign made these gains appear to be the real thing, demonstrating once again the terrible cost of disabling free mar- ket price signals.Moreover, when the rebounding demand for risky credits enabled the issuance of nearly $3 trillion of highly leveraged bank loans and bonds during the three years ending in 2007, the result was a “dilution illusion.” The junk debt default ratio fell mainly due to arithmetic; that is, the swelling of the denominator (bonds) rather than shrinkage of the numerator (de- faults).


Thus, by the end of the second Greenspan-Bernanke bubble the total volume of leveraged debt outstanding was nearly three times higher than in 2001–2002. At the same time, the temporary credit-fueled expansion of the US economy caused new junk bond issues to perform reasonably well. Due to this happy arithmetic combination, the measured default rate plummeted sharply, dropping all the way down to 0.6 percent by 2007.


Yet this was a preposterously misleading and unsustainable measure of junk bond risk, since it implied that the Fed could prop up the stock market and extend debt-fueled GDP growth in perpetuity. Nevertheless, having quashed the free market’s attempt to cleanse the junk bond sector in 2001– 2002, the Fed had now enabled the leveraged financing cycle to come full circle.


During the final stretch of the bubble in 2006–2007, the junk bond yield stood at about 7 percent and was juxtaposed against what appeared to be negligible default rates. Not surprisingly, this generated a vast inflow of yield-hungry money into the junk bond market, and a blistering expansion of the market for securitized bank loans.


The latter were called CLOs, for collateralized loan obligations, and were another wonder of bubble finance emanating from the same financial meth labs that produced mortgage-based CDOs.


In this instance, however, Wall Street dealers sold debt to yield-hungry Main Street investors that had been issued by what amounts to financial “storefronts.” These shell com- panies were stuffed with LBO junk loans rather than subprime mortgages. The daisy chain of financial engineering was thus extended one more notch: leveraged buyouts were now financed from the proceeds of bank debt which, in turn, was funded with the proceeds of CLO debt. Nor was that the end of the leverage chain. Not infrequently, these CLO “store- fronts” also employed leverage to enhance their own returns.


Thus did the true equity in the system retreat ever deeper into the financial shadows. By the top of the cycle in 2006–2007, the CLO market of debt upon debt upon debt was expanding at a $100 billion annual rate, compared to less than $5 billion at the prior peak seven years earlier. In its headlong pursuit of asset inflation, therefore, the Fed was spring-loading the financial sys- tem with a fantastic coil of debt.


As it happened, however, the miniscule 2007 default rate for junk loans was no more sustainable than had been the initially low default rates for subprime mortgages. By 2009 defaults were actually back above 10 percent, signaling the third junk market crash since 1990.


Accordingly, investors and traders fled the leveraged loan markets even faster than they had stormed into them. Junk debt issuance plunged by 85 percent from peak levels. The CLO market disappeared entirely.


This cliff-diving denouement should have come as no surprise. Near the end of the boom, many issuers were simply borrowing to pay debt service and few had sufficient excess cash flow to withstand a sharp economic downturn. The massive coil of LBO debt fostered by the Fed’s financial repression policies had thus been an accident waiting to happen.


Yet the leveraged finance boom went on right until the eve of the 2008 Wall Street meltdown because risk asset markets had been sedated by the myth of the Great Moderation. If the Fed had indeed abolished the risk of steep and unexpected business cycle downturns, as Bernanke claimed, the corollary was that deal makers were free to push leverage ratios to new extremes. This was a matter of spreadsheet math: the banishment of recessions obviously meant that the cash flows of leveraged business wouldn’t plunge in a downturn.


It also meant that the junk bond interest rate spread over risk-free treasuries would stay narrow, owing to reduced expectation of recession- induced defaults. So the junk market’s read on the Great Moderation was that it meant a floor under cash flow and a cap on default risk. Better still, since many junk bonds now had the “toggle” feature, they couldn’t default; they could just add the coupon to what they owed.


If defaults were thus minimized or eliminated, the hefty yield on junk bonds would be pure gravy. Not surprisingly, the leveraged loan market be- came fearless, happily assuming that the Fed had infinite capacity to prop up the economy and peg the price of risk. Nearly two-thirds of all the junk bonds issued in 2007 were of the so-called covenant lite variety, and that was another canary in the coal mine.


The purpose of covenants is to trap an LBO’s cash flows inside a company’s balance sheet for the benefit of the bondholders. So when these protections were permitted to fall away, it meant that high-yield investors were no longer looking to the borrower’s cash to keep themselves whole. In- stead, they assumed that borrowers who didn’t have the cash to redeem their debts at maturity would simply refinance; that is, investors would get their money back not from original issuers but from the next punter in the Ponzi.


Likewise, purchase prices for larger LBOs soared to more than 10X cash flow, compared to 6.5X when Mr. Market was endeavoring to heal the excesses of the previous leveraged finance bubble back in 2001–2002. Indeed, the light was flashing green for issuance of every manner of risky credit. These included second-lien loans, which effectively meant hocking an LBO company’s receivables and inventory twice.

View the original post at Bloomberg.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Xibalba's picture

Fed: Mission Accomplished!

aVileRat's picture

FT UK edition reporting that Apple will be going forward on a 70B bond issue in both euros and USD. Now why would a company with over 30 billion in cash, need more cash, unless their 10Q cash is not really cash. In much the same way Tyco really did not have Tangables/Book Cash under FASB.

Of course, who cares right ? market will rally on the news, and every pension fund will need to take down some to keep their bond market weights.


knukles's picture

Apple supposedly has a humongoliod ihedge/iprivate equity funds operation. 
So in many cases, corporate cash for firms like Apple is nowhere near "corporate cash" in any traditional sense of the matter.

Now, the $64 Billion Question is, "In what is that pile of "cash" invested?"
I have no knowledge of the details/specifics, but what would be a big risk at the margin would be if they were heavy players in the IT/software/hardware businesses.  Co-variance of risk problem.
Would be akin to an insurance company buying nothing but disaster bonds.
Taking on the very same risks on both the asset and liability sides of the ledger ...

But, if they're funneling the monies into that "business" it's not a bad time to take on some LT debt, no?
Maybe, maybe not...
Believe in the liquidity trap or not?

Baldrick's picture

Tyler covered that a couple years back, search zh archives for Braeburn.

pitz's picture

Apple's problem is that most of their 'cash' is either offshore, or is tied up as collateral for guarantees made to suppliers, and customers.  A significant haircut must be applied accordingly.  Always beware of firms that engage in increasing levels of financial, as opposed to real engineering. 

DoChenRollingBearing's picture

Most of the big gold mining companies are losing money.

Yet they are consolidating, borrowing money to do so.

But, they are still losing money at $1300 gold!  Here are some facts on 25 of the biggest ones:

"Gold Mining Companies"

aVileRat's picture

Yeah, as Munk will likely write about someday: the inflation to build a new mine is killing them. Hell, it's killing all the miners since strip/hole mines are horrible for CapEx efficency vs. other asset classes. A metals mine is the new Airline sadly, unless Acid leaching or chemical open-hole recovery takes off, mine labour, insurance risk and production strip rates are suffocating everyone.

The big problems are

1. Miners had their own "Bakken Binge" which we saw in the US/Canada in 2009-2013 where streaming/flowing metrics went full retard and it became Growth at any valuation to prevent someone else from snapping up your resource deposits. Sadly, many of those price decks did not take in account the inflation costs in metal, or the costs for warehouse/export off-take. As such, while Risk-NAV/oz or /share looks accretive, many of those mines around the world (including Pasq). will never be built until gold hits 2900/troy oz. at least.

2. Miners free cash flow does not equal their gross impairments and operating losses. No mine with interest/loan schedules can afford to shut down, so they will continue to drive on until a commodity trader bothers to take on the costs associated with the shut-in and impairment charges.

3. Many miners are smoke shows. Hell, I would bet over 90% of the TSXV and ASX gold juniors will never recover their cost of core holes. Exploitation and site recovery costs have tripled since 2001. Sadly, for retail investors who do not know any better, mining juniors have no obligation to report their prospective project costs so the current roster of 0.3x P/P50 or P/NAV look like screaming buys to the Howe Street punters. However to everyone in the know, and the key guys in in the industry know: none of these subpar veins will be worth a crap at 1,200 let alone 1,900 in 15 years. Labour costs alone will shred the NPV's. 

4. Tax holes and tax breaks are closing up. So tax bills on per oz. basis are spiking up. Many gold mines were just promotes or tax gimmicks to begin with, long before BreX made people aware of the GOR/Resource Fraud gimmicks.

5. Gold debt is at a record high, not including punters who are in the GLD and are speculating on GLD on 1.9 or even 3.1x leverage (cough cough: Glencore). If Moody's ever could be bothered to study resource engineering half of these corps would barely trade above Junk.

6. The debt hangover is actually impairing many production & development corps since nothing is accretive to /oz. and /sh. at these levels. The gold sector is in the middle of their own "white elephant hangover" which hit the oil sector in the 1980's. How did Oil/Gas get out of it? Go ask Gulf and Amoco. Like watching your hung-over roomate cry through his final exams, it sucks to watch the Gold sector compress, but he did it to himself. Best just wait until the sector hard resets in 3 to 10 years.


DoChenRollingBearing's picture




Thank you for the very informative response.  You raise points I have never seen before.  Time for more reading!


Soul Glow's picture

I starting buying miners in the Winter of '09 - '10 and sold out in the Spring of '11.  Input costs are high and their end good (precious metals) have been talked down - litterally talked down by Bernanke nevermind whatever price manipulation goes on too.

Miners will be profitable again, but not right now.  Not until gold moves above $1900 again, but that will happen soon enough.

new game's picture

i rode the miner horse like you til 10 ish with my wifes 403b. 50/50 fidelity selects gold and oil-nice double and on out and cash now. after penalties and tax still way ahead of letting er roll...last take in the markets - done and gone for good-gone galt on the fucking paper markets....

wintermute's picture

I think this is the most important must-read article on ZH this year.


new game's picture

agree-forshadows some juju coming to a life style near you...

Bangin7GramRocks's picture

Damn Community Reinvestment Act! Fucking Liberals!

nmewn's picture

Irrational exuberance, bitchez ;-)

neidermeyer's picture

Just doin Gods work.

Jstanley011's picture

Romney's revenge...

knukles's picture

Like Montezuma's Revenge, sounds like something you get eating unwashed raw meat in Washington DC.

DoChenRollingBearing's picture

I am not going to overthink that one...

knukles's picture

DoChen, that wasn't really meant to be dwelt upon at length ...
But now you've got me conjuring up all sorts of unreasonable imagery...

DoChenRollingBearing's picture

So, it's my fault now......!?!?!?!

knukles's picture

Of course, I'm the victim... 

DoChenRollingBearing's picture

No!  No!  I am the victim!  And where the hell is my damn check?

yogibear's picture

Borrow all you can, buy PMs, and default/bankrupt.

The US is printing away it's currency.

DoChenRollingBearing's picture

The "Chumbawamba Strategy" goes mainstream Zero Hedge!

Atomizer's picture

Chumbawamba is missed on ZH, Miss his post during catulpa password ZH era.. Welcome back bitch.

chumbawamba's picture

I'm around, here and there.


new game's picture

nobody said " fuck wallstreet" yet...

medium giraffe's picture

Look at exposure since 2007.  We averaged up the debt and kept on rocking - so this is crazy, but no one should be surprised.  

Compound interest and the wonder of the exponent.  Just watch.   

EggSlayer's picture

Will Tyler continue to claim " ______ Just Like 2007!!" until the end of time? We will have to wait and see...

knukles's picture

Did Tyler write the article?

knukles's picture

Troof ...
Does seem to be a recurring theme...

Winston Churchill's picture

Asset stripping by another name.
Guess who is the bagholder again ?

Pure Evil's picture

Would that be Reggie Love while scarfing down some unwashed dark meat in an undisclosed location somewhere around 1600 Pennsylvania Ave Washington D.C.?

knukles's picture

Between you and DoChen....

I had been planning on having a warm Pastrami sandwich....

Atomizer's picture

Just look at the dribble the Bank of International Settlements fronts. Cooperation bullshit


I can no longer select a link, to share with ZeroHedge family. The mother of all Central Banks cannot keep the lie in motion any longer.

DoChenRollingBearing's picture

You DO understand that posting and reading links like that will make you go blind?

Yen Cross's picture

     Last one out of the casino please remember to turn out the lights.

  Thank you,

  Mr. Yellen

I Write Code's picture

This is financial strip-mining pure and simple - and is a by-product of the Fed’s insane repression of interest rates.

Yes.  But it does not suggest any great default rate.  All it says is that the real interest rates are negative, the nominal rate is less than inflation.  A rational actor will borrow up the wazoo in such a situation, and if all they do with it is pay dividends and do stock buybacks, then you want to be a stockholder!

SmilinJoeFizzion's picture

Borrow all you want, apparently the weather will still fuck up your program

Radical Marijuana's picture

"This is financial strip-mining pure and simple ..."

As, for instance, Gail Tverberg's articles have been outlining, this is a microcosm of the macrocosmic events, with the financial strip-mining that is being allowed in the political economy foreshadowing the trajectory of the strip-mining being allowed to blow its own kind of bubbles of "developments" in the ecological environment, which will burst in far worse ways!

That our political economy is controlled by triumphantly runaway financial frauds, and their consequences, is relatively trivial compared to what that is doing to the natural environment. The social polarization effects of the "little people" having their lives destroyed by the financial predator/parasites is relatively nothing to the similar, but orders of magnitude worse, effects of destroying all the "little species" in the natural environment.

Those kinds of financial predator/parasites, who are allowed to make a profit from destroying businesses, all are adding together towards making private profits from destroying the natural environment. It is an insane monetary system that is able to operate with attitudes of evil deliberate ignorance towards its overall ecological environment. It is concurrently becoming more blatantly obvious that the same evil deliberate ignorance is destroying the political economy too.

"Each time the Fed sponsored financial bubble eventually burst."

The existence of the Fed is due to the application of the methods of organized crime to take control over the political processes, in order to legalize frauds, and back those up with legalized force. While that enables those who control the blowing of the bubbles to profit both from riding them up, as well as having more insider information to know when they are going to pop, so that they could also profit from riding them down, COLLECTIVELY, OUR CIVILIZATION IS ACTING WITH ATTITUDES OF EVIL DELIBERATE IGNORANCE TOWARDS THE OVERALL ENVIRONMENTAL CONSEQUENCES OF THAT SYSTEM FUNDING THE STRIP-MINING OF THE PLANET.

Too bad, so sad, that there are no practical political ways to prevent the best organized gangs of criminals from controlling civilization, since the longer term consequences of that will not merely be creating conditions of irreconcilable social polarizations, but also, irreparable destruction of the natural world. The runaway triumphs of parasitical financial frauds are not merely killing off their host political economy, they are much more importantly killing off their host natural environment. The achievement of the legalized ability to make "money" out of nothing as debts has not merely destroyed free market capitalism, it has also driven that system of financials frauds to have even more destructive consequences upon the natural environment.

The ability to operate a system in which "money" can be made out of nothing, and disappear back to nothing, is not merely a fraud through which some human beings are able to rob others, it is also a fraud which makes it utterly impossible for the human economy to be reconciled rationally with the natural ecology within which it operates. When the vast majority of human beings maintain their attitudes of evil deliberate ignorance towards the social insanities manifesting in their political economy, they are even more so operating with attitudes of greater evil deliberate ignorance towards what controlling civilization through financial frauds is cumulatively doing to how its treats its natural environment.

Human beings were always operating as robbers in their environment. Now, they are doing so using technologies which are trillions of times more powerful. Thus, the methods of organized crime that made and maintained human civilizations are not merely enabling themselves to be destroyed from the inside out, and so, risk imploding collapse, they are also destroying the natural environments, in ways which risk being crushed under the collapses of those natural systems. However, that being said, there are no practical political ways to prevent that happening, since the established systems continue to allow runaway privatization of the profits, along with socialization of the losses, so that those who gain those profits continue to be able to even more dominate the political processes, in order to continue to allow even greater legalized frauds. The factors that should be paid attention to, regarding the longer term consequences of blowing fraudulent bubbles are being ignored within the human world, and even more ignored within the natural world.

Learning about how financial bubbles are blown, and then pop, due to fraud, and then too much fraud, may well enable those who understand that being better able to personally operate within those human systems. However, the collective, great cycles of those frauds financing the strip-mining of the planet is not going to be something that human beings end up benefiting from in the longer term. A civilization that is controlled by triumphantly runaway financial frauds is criminally insane, and thereby, driving itself madly towards its own destruction. ...

Catullus's picture

Get out your popcorn. EFH is finally going down this week.

KKR took very little risk on it yet got all the dividends.

You'd think they'd let the last LBOs go tits up before doing them again

Senior bond holders, even if you think you'll get the assets in the end, you'll get 7 year depreciated assets with almost no money reinvested to actually maintain those assets. You couldn't ask for a worse deal.

SmilinJoeFizzion's picture

When u can borrow money for free, the Arb always has a spread until the curve inverts. Yield curve is starting to resemble the bunny slope of 2007. Margin compression is inevitable . I sense a few boys will be upside down real soon. Time to invest in metal detectors. I hear pieces of 8 are still washing up on the treasure coast after a good storm.... I'm long 16th century PM and beef jerky

eddiebe's picture

This is all very true and very depressing. Personally I see no way off the treadmill for honest working people. The vampires are in full control and are sucking the life-blood out of everything that walks grows or crawls with complete impunity reaping the good life.

Yup, very depressing when the most we can hope for that the whole sick structure comes crashing down to maybe take some of the sick sociopaths down along with the wrecking of it all to get some justice finally maybe. Ugh! What's the use.

Soul Glow's picture

CAPEX for oil companies have never been higher, Mr Stockman.

BullyBearish's picture

But, but, but...we didn't see it coming!

williambanzai7's picture

This is the IMF model for the Ukraine

teslaberry's picture

green shoots bitches. 

polo007's picture

According to Tullett Prebon Group Limited:

perfect storm

energy, finance and the end of growth


The economy as we know it is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge.

Through technology, through culture and through economic and political change, society is more short-term in nature now than at any time in recorded history. Financial market participants can carry out transactions in milliseconds. With 24-hour news coverage, the media focus has shifted inexorably from the analytical to the immediate. The basis of politicians’ calculations has shortened to the point where it can seem that all that matters is the next sound-bite, the next headline and the next snapshot of public opinion. The corporate focus has moved all too often from strategic planning to immediate profitability as represented by the next quarter’s earnings.

This report explains that this acceleration towards ever-greater immediacy has blinded society to a series of fundamental economic trends which, if not anticipated and tackled well in advance, could have devastating effects. The relentless shortening of media, social and political horizons has resulted in the establishment of self-destructive economic patterns which now threaten to undermine economic viability.

We date the acceleration in short-termism to the early 1980s. Since then, there has been a relentless shift to immediate consumption as part of something that has been called a “cult of self-worship”. The pursuit of instant gratification has resulted in the accumulation of debt on an unprecedented scale. The financial crisis, which began in 2008 and has since segued into the deepest and most protracted economic slump for at least eighty years, did not result entirely from a short period of malfeasance by a tiny minority, comforting though this illusion may be. Rather, what began in 2008 was the denouement of a broadly-based process which had lasted for thirty years, and is described here as “the great credit super-cycle”.

The credit super-cycle process is exemplified by the relationship between GDP and aggregate credit market debt in the United States (see fig. 1.1). In 1945, and despite the huge costs involved in winning the Second World War, the aggregate indebtedness of American businesses, individuals and government equated to 159% of GDP. More than three decades later, in 1981, this ratio was little changed, at 168%. In real terms, total debt had increased by 214% since 1945, but the economy had grown by 197%, keeping the debt ratio remarkably static over an extended period which, incidentally, was far from shock-free (since it included two major oil crises).

russwinter's picture

There's More to the Story of Ultra Junk Finance: