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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OldPhart's picture

Today we had a management meeting (five fucking hours of lost time I could have used to to productive things) where the company's owner gave a lecture on how we should plan for retirement, invest in the market, and put the maximum money allowable into our 401-k's.

I'm sitting with the loud, non-PC, and one of us is this huge, tattooed, ex-felon, quietly calling bullshit on his entire lecture.  [Side, whispered conversations were:  "What's worth more gold or bullets" "Bullets, 'cause you can steal more gold."  "If you're 75 and broke, what's the best thing you can do?"  "Rob a bank, get three hots and a cot, free health care and you're too old to fuck."

Sorry, I egged him on, and brought out his real feelings on the bullshit of investing in today's society.  Meanwhile, not ONE fucking dollar of mine is going to Wall Street.  I deplete my bank account within days of any money hitting it.  And I stopped sending ANY money to my 401-k in 2008.

I now have a six months food supply, about 3,000 rounds of Pb (FMJ) [Tattoo guy has 20,000, so I guess I have to step it up a bit], about two months water, [not enough, need six months], and I still don't feel too secure.

I only have eight ounces of gold, 30 pounds of silver...what do I do now?

Bemused Observer's picture

Hit those yard sales...you'll double your holdings by fall. And at surprisingly cheap prices.
I'm averaging almost 8 grams a week in gold, and I don't even bother using the gram scale for silver...just pile it on the bathroom scale and get an estimate.
God, I wish I'd started doing this years ago...*sigh*

OldPhart's picture

Go to your Human Resources Manager and tell them "I want every fucking penny in my 401-k cashed out and put in my hand."

Try it...

YOU CAN NOT DO IT.  Your 401-k money cannot be withdrawn under almost any circumstance.  Even a loan must be documented by hardship like you're about to be foreclosed on your mortgage, and the loan is only allowed to be enough to get your ass caught back up.

You [we] are already under capital controls, but most haven't bumped up against them, and most of you are putting your fucking money into the system.

If you're contributing to any sort of retirement account, count the money as confiscated.  You're not going to see a dime.  You, personally, curently owe $820K to the War Criminal Government of the USSA.  Shove that up your ass, make it comfortable...because if you don't, when our WCG comes calling it will be very rough and unpleasant.



detached.amusement's picture

they'll say "you can have the other half when you leave the company"


its right in the fine print

i_call_you_my_base's picture

It will be a great moment when these guys think they've scored big, only to find out a second later that their trades are nullified and the markets have been frozen.

WhackoWarner's picture

come on and get real.  Big Boyz never get shut out. Their trades go through.  Force majeure is always on the retail side,  Big crap gets out early and leaves pension plans and Mom and Pop holding.


Frozen markets have no concern because the big crap is already gone.   Get with the shearing already and BTFD.

i_call_you_my_base's picture

The "Big Boyz" are the banks not investment funds. If you don't take retail deposits you can be left for dead like the rest of the retail investors.

Kprime's picture

there ain't no Mom and Pop left in the market.  It's all Fed.

OldPhart's picture

Fuck...Tyler Durden is omnipotent...




My wife will lend out her lube...it hasn't been used in several years...any takers?

We're all going to need it.

WhackoWarner's picture

You are deluded if you think this ia anything but some fantasy.  These guys do no get caught.

i_call_you_my_base's picture

And you can stick your condescension up your ass.

Kprime's picture

don't get caught, hmmmm, why did the taxpayers have to cough up trillions of dollars to bail some stupid, we'll never get caught, muther fuckers??

SuperRay's picture

So you're saying what?  That they were stupid to get bailed out.  Those fucks Dimon and Blanfein are billionaires.  Where did that money come from?

OldPhart's picture

"You didn't build that!"

Mebbe the shitass was on to something there...

oldmanofthesee's picture

We know from ZH (great job), that GS puffed up their balance sheet from $800B in "commodity" derivatives, to over $4T, just in Q1 15. Ditto for Citi.

We know the stupidest politicians on the earth, passed legislation, late last year, putting the taxpayers on the hook, for this disaster. We know the Gov is complicit, 'cause they moved PM derivatives to FX reporting. The buyer of last resort for these treasuries, is the Federal Reserve. Is this the greatest scam you've ever seen?

hxc's picture


It's what comes after


SillySalesmanQuestion's picture

Everyone sell everything tomorrow! Except....gold and silver bitchez...hehe.

Kaiser Sousa's picture

"it's a big club and......."

fill in the blanks...

Arnold's picture

.. ,,,,,the hookers and blow run out soon?


(Fire up the Gulfstream, Agnes!)

rogerrabbithole's picture

Fed initiates nirp the same week Kaitlin Jenner's reality show starts, and ALL is well.

Rogue Trooper's picture

Got me thinking.  How about "Katilin" rigs up a "Go-pro" for some real-time, reality vid posts when Californication goes "Mosul" on their lame progressive arses.  Girlz gotta make a dime.

I'd subscribe for sure.....

NuYawkFrankie's picture

There's another thing that Wall St is gonna reap: The Whirlwind.

Up close and personal. The dumb fcks just don't realise it...  yet.

To Hell In A Handbasket's picture

NuYawkFrankie:-"There's another thing that Wall St is gonna reap: The Whirlwind.

Up close and personal. The dumb fcks just don't realise it..."  yet.

Pure fantasy. I wish it were true, but the Powers that be will use divide and rule, plus diversionary tactics to foster civil unrest between the masses, before they realise who the real culprits are. By the time that happens, these dual citizens will be long gone and our subserviant treasonous politicians will plead stupidity, coercion and not wanting to crash/kill the American dream, so they went along with it all.

TeethVillage88s's picture

Maybe a completely different Occupy Wall Street with Camping, Trailers, Trucks, Hotels filled up for 50 miles around... or the equivalent in NYC... Sleeping in Plazas, and Parks.

Bastiat's picture

Big question:  will they buy the entire real estate market like they did after 2008 or will there finally be a de-leveraging market clearing implosion.  Panic selling by specs, flippers with no chair when the music stops, suddenly unemployed startup techies heading back home after defaulting on their over-priced rental leases and all that. 

Bastiat's picture

No wonder the big gold smackdown came in front of the bubble busting turd earnings.

disabledvet's picture

If interest rates on dollar denominated assets suddenly hit 12% on the overnight that will justify NASDAQ 5000.


"Think about it."



Move along....

Bitcoin Meiser's picture

Bingo! It all starts tomorrow.


"Sell, sell, sell!" 

- Jim Cramer

Deathstar's picture

You got it wrong, That kike is screaming buy, but BUY! To the dumbass sheeple Goy, he is helping to destroy.

Oh, that kinda rhymed, didn't it?

Dr. Engali's picture

Yeah good luck with that. If they believe that we are going to see another 2009 they are nuts. When this illiquid market vaporizes there will be nobody left standing to collect from. The casino will be closed. Bye, bye, have a nice day. Here's your spider man towel.

steelhead23's picture

Right on.  The Fed would no more allow the big hedgies to fail than it would the big banks.  If high yield bonds tumble, the Fed would buy them, or take them at its overnight window every day until the illiquid becomes liquid again.  Anyone who thinks they can see a market collapse coming without reviewing Fed behavior in 2009 is simply dumb.  Go for it guys, I hope you make money, but I ain't joining you.

willwork4food's picture

That might be the way it plays out. But then there will be real increasing inflation each month. Until its no longer call "increasing".

BanksterSlayer's picture

Time to crack down on malicious short sellers, or anybody who intends to become one.

HungryPorkChop's picture

@BanksterSlayer : You meant to say "Time to crack down on malicious short sellers, or anybody who intends to become one unless its in the gold and silver market.  Then they get a hall pass." 

keremetski's picture

Please do. That miniscule number of brainless retail investors deserve it.

Arthur Schopenhauer's picture

Stay (thirsty) hedged, my friends.

Bitcoin Meiser's picture

The reason why Donald Trump can get away with his insane rhetoric is because he knows what's coming, and he knows the average, poor US citizen will be very angry.

401Ks will be wiped out and people will have to work until the age of 70 before they can retire. Retire poor.

Arthur Schopenhauer's picture

Donald Trump is just capitalizing on what Bernie Sanders has been saying for the last 20 years. 

surf0766's picture

The communist Berni wants us to adopt a healthcare system from another country where the income tax rate is 46% and after you are done eating in you 890 sq ft house you get to buy mandatory gap insurance to cover what the mandated government healthcare insurance does not cover.  Screw Bernie and his socialist , 60's hippie, communist bullshit

El Gringo's picture

Bernie is a JEW.  They cannot be trusted.   They are parasites.   End of story.

falconflight's picture

But you would trust a Roman Catholic Socialist?  Or a avowed christian Athiest Socialist?  How bout a Muslim apostate Socialist, better?  Clean you buttplug, it's infecting your nerve endings. just a suggestion.

Fahque Imuhnutjahb's picture

Keep an eye on the folks who the MSM tries to marginalize, ignore, or discredit, because these will be the ones who may hold the common good of the citizenry as a higher priority than the WELFARE of TPTB.  Paul,

Sanders and Trump(although him for other reasons) are getting the Goebbles psyops treatment.  If Rand Paul and Bernie Sanders could agree to address their common ground issues, while sidelining their contentious

issues, they could form a coalition that would scare the shit out of TPTB.  And ifs & buts were candy & nuts, yada, yada.  Divide and conquer tactics are very efficient in perpetuating a status quo.  So if the current

trend/trajectory suits your needs then why not install a dynastic figurehead sure to keep it business as usual.


Paul & Sanders 2016!!   sure, and  Bigfoot and Elvis 2020!!

Arthur Schopenhauer's picture

There are many who consider Bernie Sanders as an independent. These are the same people who view people like yourself to be a radical. Have you ever even considered that?

ersatz007's picture

Yeah because the socialism we have now is so much better.