Wall Street Prepares To Reap Billions From Another Main Street Wipe Out

Tyler Durden's picture

On Monday evening, we noted that market participants are reducing the size of their trades and turning to derivatives in order to avoid the perils associated with what are increasingly illiquid markets. 

While we’ve been pounding the table on bond market liquidity for years, the rest of the world (operating on the standard 2-3 year time lag) has just begun to wake up to how thin markets have become. Now, pundits, analysts, billionaire bankers, and incorrigible corporate raiders alike are shouting from the rooftops about the pitfalls of illiquidity. The secondary market for corporate credit has received the lion’s share of the attention (for reasons we outlined yesterday) and as Carl Icahn was at pains to explain to Larry Fink last week, ETFs are a large part of the problem. 

The story is simple. Shrinking dealer inventories (the result of a post-crisis regulatory regime wherein the term "prop trader" is taboo) have made it harder to transact in size without having an outsized effect on prices for corporate bonds. Meanwhile, artificially suppressed borrowing costs and the attendant hunt for yield have led to record corporate issuance and voracious investor demand. In short, the primary market is booming while the secondary market has become a veritable no man’s land. If you need an analogy, try this: the crowded theatre is getting larger and more crowded while the exit keeps getting smaller.

The proliferation of ETFs has made it easier for the retail crowd to chase yield in corners of the bond market where they might not have dared to venture before, and this has only served to create still more demand for things like high yield credit. 

Now, with the US staring down a rate hike cycle, and with some corners of the HY market (see HY energy for instance) facing a number of insurmountable headwinds going forward, the fear is that the retail crowd will all head for the exits at once, leaving fund managers with a very nondiversifiable, unidirectional flow which will force them to sell the underlying assets into illiquid markets. Due to a generalized lack of market depth, that selling pressure has the potential to trigger a rout. Of course a sharp decline in prices would send still more panicked retail investors to the exits necessitating even more asset sales by fund managers and so on, and so forth.

But don’t take our word for it, here’s WSJ with more on how Wall Street is preparing to profit from an unwind in Main Street’s ETF and mutual fund portfolios:

Wall Street is preparing for panic on Main Street.


Hedge funds are lining up to profit from potential trouble at some "alternative" mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors.


Financial advisers have pushed ordinary investors into those funds in search of higher returns, a strategy that has come into favor as Federal Reserve benchmark interest rates remain near zero. But many on Wall Street worry the junk bonds, bank loans and esoteric investments held by some of those funds will be extremely hard to sell if the market turns, leaving prices pummeled in a rush for the exits.


Concerns about such scenarios have been escalating for some time. Now, investment firms such as Leon Black’s Apollo Global Management LLC and Oaktree Capital Management LP are laying the groundwork to cash in if they come to pass.


Apollo has been raising money from wealthy investors and portfolio managers for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: "ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit."


Guided by a similar outlook, Reef Road Capital Management LLC, led by former J.P. Morgan Chase & Co. proprietary trader Eric Rosen, has been betting against, or shorting, exchange-traded funds that hold junk bonds and buying options that will pay off if the value of these high-yield securities falls.


The hedge funds are taking aim at what is regarded by many on Wall Street as a weak spot in the markets. "Liquid-alternative”" funds have emerged as one of the hottest products in finance, fueled by a promise to deliver hedge-fund-style investing to the masses. They use many of the same strategies as hedge funds, with wagers both on and against markets, but are open to less-wealthy investors with fees closer to mutual-fund standards.



Liquid-alternative funds manage a cumulative $446 billion, according to fund tracker Lipper, up from $83 billion at the start of 2009. High-yield bond ETFs, another popular product, manage more than $38 billion, and in the week ended last Wednesday took in their biggest inflows on record at $1.5 billion, Lipper said.


Activist investor Carl Icahn brought the issue to the fore last week, saying at an investment conference that he feared a bubble was expanding in junk bonds thanks to the rush into high-yield exchange-traded funds run by companies like BlackRock Inc.


Managers of ETFs and liquid-alternative funds said they are well-protected against any tumult. Some have lines of credit to cover redemptions if needed and point to research showing that even during past crises, mutual-fund investors generally withdraw no more than 2% of assets each month.

When Reuters first reported that fund managers were lining up emergency liquidity lines like the ones mentioned above, we smelled trouble and were quick to note that not only did that not bode well for the market, but that funding redemptions with borrowed cash is a fool's errand and depends upon the market stress being transitory (see here and here). But beyond that, it betrayed the extent to which the country's largest and most influential ETF issuers have become worried about just the type of meltdown the hedge funds mentioned above are banking on.

If you want a candid take on just what the smart money thinks is ahead for all of the retail money that's been herded into esoteric ETFs, we'll leave you with the following from David Tawil, president of hedge fund Maglan Capital, who spoke to WSJ:

"They are going to be toast. It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors."


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max2205's picture

Stupid crackers 

zorba THE GREEK's picture

who knows how long this manipulated market will last? I thought the party would be over long 

ago but it keeps going higher while gold and silver get hammered. I am going to just sit and

wait until the party is over. That is when I cash in some of my chips (PMs)

Row Well Number 41's picture

"If god did not want them sheared, he would not have made them sheep."

    --  Caldaron, Magnificent 7



BullyBearish's picture

We're all sheep...props for the reference though

Oh regional Indian's picture

It's interesting to note how they call them dealers who hold inventory....

Makes banking sound like a legitimate business...

Hi, I'm Bond, Crashing Bond...

Haus-Targaryen's picture

Retail, emotional investors.  

There it is.  That guy that just leased a new 3 series and took out a home equity loan for a new kitchen and vacation to the Bahamas -- that guy is going to get creamed.  

Darwinism in investing.   

Dead Canary's picture

No, no, no! We are all DEAD CANARIES!

Doubleguns's picture

Add dead pensioners to the list.

Row Well Number 41's picture

Well some of us are Rams, but you know what that means...



Fahque Imuhnutjahb's picture

Weren't rams the ones that were put on the altars of old to have their throat slit?

OldPhart's picture

If you're part of the Retail Crowd, I have no sympathy.  The signs were posted since 2008.  That fact that you were too stupid to read them doesn't count.  You're an idiot for putting any money into the market when it is obviously rigged to scam you.

In this instance, I hope you get every loss coming to you.  I don't care, I hope you get fucked in the worse way.  The warnings were raised damned near eight years ago and you continued to put money into the system, enthused as the market went higher...and thought you had wealth.


armageddon addahere's picture

I listened, and stayed out of the stock market, while it went from 666 to 2100. Thanks for nothing.

lordkoos's picture

Don't feel bad -- I listened, bought gold and silver, and am now down $40k.

LongMarch's picture

Popcorn.Don't forget to buy the popcorn.

cocoablini's picture

This would assume the following:

Retail investors(and they are...where?)
Volume(mostly made by BOTS)
Government non-intervention(when has that happened since 1987?)

bigkahuna's picture

Those emotional retail investors are indeed machines. When machines start emotional selling it is pretty much straight down - 0 or 1 -

Tall Tom's picture

The Wall Street Broker and the Central Banker are as American as the Bald Eagle. Yes you understand that symbol..of FREEDUMB.


Watch this video of DOZENS of Bald Eagles...




...SCAVAGING the remains of DEAD CARRION.


Yes. The symbolism is undeniable.


But unlike what happens at Wall Street and at the Banks...the Police actually showed up to break up this motley crew, this ring of undesirables...fucking scavangers.


That is what America is about, folks.


The title needs to read, "Wall Street to Reap Billions from Scavanging the Carcass of the Once Vibrant Main Street.

Tall Tom's picture



Someone is butthurt watching the Bald Eagle, the United States symbol of National Pride, behaving as it is, a true scavanger.




A Entitlement mentality STATEist, Socialist cannot handle the truth, after seeing that video.


I am just so sorry.


"My God...What is next??? They are now even attacking...the Bald Eagle.  It is a shame...a crying shame. We must pass a law to prevent that. That symbold of THE SCAVENGER must be protected at all costs!!!"

Amish FinEng's picture

Let's go easy on the all night drinking binge Tom.

Tall Tom's picture

I do not drink.. I make no time for that.


I do not use drugs. I make no time for that.


But I do make plans. And I have plenty of time for that.


I educate myself continuously...about topics that you will find arcane and yet I see the applicability.


Come on over and let me show off my Chemistry Lab and my metallurgy lab.


Let me show you my collection of Rockets


We will have a blast....


12223B Woodside Ave. Lakeside, CA USA.


Have you ever read the Unabomber Manifesto? Now that man makes sense.


In fact most here will be most agreeable to what he has proposed.


Here it is for download...




What is funny is that we came from the same school. We both studied Math.

FreeMoney's picture

Uh....NSA/FBI knocking on your door in 3 -2 -1.....

detached.amusement's picture

He's entirely correct.  Go to Glacier Bay sometime, and watch the bald eagles flock to the pier where the fishing boats dump their non sellable parts, the adults pecking away the juveniles until they've had their fill.  Anywhere there is society, they behave like this.

And every August, when the salmon line the river beds, they behave like this.


its all because they LOOK "majestic"

Bemused Observer's picture

The crow should be our national bird. Damn, those buggers are SMART!
We had one that used to torment our blind cat. He'd wait till she found her water dish and started drinking, then he'd use his beak to pull the bowl just out of her reach, and do a "victory dance" all around her while she poked around trying to find the dish. Then he'd do it again.

Bemused Observer's picture

Well, ok, maybe he was more of a dick than a genius...

DLux's picture

LOL! He did a victory dance...

Crows are smart for birds, but most days I'd like to shoot their loud cawing ass out of the trees.

Bemused Observer's picture

I think someone suggested the turkey as a better national bird. Maybe, I don't know. We have lots of wild turkeys around here, and they don't seem to bright. And they do something that reminds me too much of a lot of folks these days...When there's a bunch of 'em, picking around, and you startle one, it starts to cluck. Within seconds, they ALL start clucking. Like reflex, just mindlessly repeating what they hear from someone else.
It's funny as hell.

LongMarch's picture

Ok, lets assume we all got our popcorn sorted. What should one drink with it? Should I go with the Scotch or the Red Bull? Maybe Red Bull for the rallies and Guinness for the crashes. Or should I go contrarian? Fuck I just don't know.

Tall Tom's picture

Personally I prefer Mountain Dew for all of it. The Orange Juice and Corn Syrup fuels the caffiene stimulation.


Keeps you sharp and alert. That is what is needed in times like these..a heightened state of awareness. It is called..oh...the Military Terminology...yes...Situational Awareness.


If they are to teach that to their troops to employ against you then it is to your advantage to have the same understanding.


There is no time for anything else...We hace crossed  the Rubicon and are past the event horizon of the abyss, where no natural law rules and the rules of normality has forever been suspended. There is no escaping the outcomes to any hazard as they present themselves. The only alternative is to MITIGATE the CONSEQUENCES at this point.


Being unaware guarantees the fatal outcome over the dismal outcome. And anything which serves to dull the senses is imprudent in this time of grave urgency and peril.


Alertness to the dynamic, hazard filled environment is the order of today and those days which are to follow..

Kprime's picture

absolutely long on popcorn.

WhackoWarner's picture

Come on. The cycle is the USA USA cycle.  So collapse?  couple of months prior to Nov. 2016...so the blame and rescue meme can be applied.


So that bitch can assume her Nazi throne,



Kprime's picture

so that must mean it's currently a Nigger Nazi throne.

Supafly's picture

Um, LO not so L (looking oveer both shoulders).  I'll check back later to see if your post is still here, you rayciss. 

bigkahuna's picture

Yeah - the racists have been here in force trolling over the last couple years. They attempt to discredit the dialog on the site with their babble in the hopes of driving in a wedge.

They picked the wrong audience - but they keep trying anyway.

neilhorn's picture

What are we, a bunch of pussies? No. Did we give up when the Nazis bombed Pearl Harbor? No. We will never give up.

Bemused Observer's picture

Ha yeah, I guess Stormfront is down again...I really wish they'd fix that.

Refuse-Resist's picture

Brilliant!  And a hearty "FUCK YEAH" from me.

yrad's picture

The Market can stay irrational longer than you can stay solvent.

I want more stawks...

WhackoWarner's picture

Nope.  It will line up neatly with the 2016 elections.  dream and lies will continue likely to Aug? 2016. Need some lead timeto blame.  And then the"rescue HOPE candidate"  Frig it is so corrupt.

HungryPorkChop's picture

Maybe the Oct 2016 surprise?  Ohhh, the suspense and Drachma is killin' me!! 

conscious being's picture

No, not 2016. A whole new House takes over. In a serious economic panic, they might lose some of their MK-ULTRA programming and actually try to start doing something for the people. Way to dangerous for the PTB. So that leaves 2015. I don't think they can drive this already limping beast into 2017.

new game's picture

fear, the emotion that causes irrational trades built on irrational policy-it be a coming.

punt you say, why do that when the referee can say 1st 10 or call a penalty and move the ball to the ten yard line and first and goal on long ball interference. fuck ya, game is rigged, outcome wall street 49, pleb 0.

no liquidity, hmmm control alt infinite digital paste patch to cover any tptf losses all put on balance sheets with billions of skim profits; no worry the quid pro, jp and citi, well and the other 15 primary dealers wink wink nod all good, oh where is paulson shorting say what? auto loans this tyme?

or is it the bonds, junk, corp, treas or packaged junk underwritten by marginal car buyers?

corp buybacks with no zing? oil rigs stacked and idle w/50 bbl?

certainly the exits have a sliding back room door for the ptb, dirrectly into the fed board room where the yellow bitch can control alt swap, special overnite discount window funds...

fed balance sheet can be how large? and who really knows if it matters anymoar.

just fear to drive a trade, tyme for some action, what you been waiting for with same results, moar anger on tap...

the only thing that gets out of control is the reactions of the observers cheerleading doom that doesn't happen. don't even waste your tyme popping the popcorn, ignorance is bliss, and i'm head in sand minus the popcorn...

Deathstar's picture

Eat this cracker, mudderfukher!

Suck those soup coolers back on that malt liquor before you get the whip again buckwheat.

Jumbotron's picture

Time to shear sheep and slaughter Muppets.

Tall Tom's picture

Next month. Blow off top.

hxc's picture

Im thinking november or decembuary. Then again i dont think yellen will taper zirp