Amid the biggest weekly collapse in high-yield bonds since March 2009, Carl Icahn gently reminds investors that he saw this coming... and that it's only just getting started!
As we warned here [5], and confirmed here [6], something has blown-up in high-yield...
[7]
With the biggest discount to NAV since 2011...
[8]
The carnage is across the entire credit complex... with yields on 'triple hooks' back to 2009 levels...
[9]
As fund outflows explode..
[10]
And here's why equity investors simply can't ignore it anymore...
[11]
[12]
If all of that wasn't bad enough... the week is apocalyptic...
[13]
Icahn says, it's only just getting started...
If you haven’t seen ‘Danger Ahead’ watch it on https://t.co/4rVAcLBsH9 [14]. Unfortunately I believe the meltdown in High Yield is just beginning
— Carl Icahn (@Carl_C_Icahn) December 11, 2015 [15]
He followed up with a brief appearance on CNBC:
As we detailed previously, [16] to be sure, no one ever accused Carl Icahn of being shy and earlier this year he had a very candid sitdown with Larry Fink at whom Icahn leveled quite a bit of sharp (if good natured) criticism related to BlackRock’s role in creating the conditions that could end up conspiring to cause a meltdown in illiquid corporate credit markets. Still, talking one’s book speaking one’s mind is one thing, while making a video that might as well be called “The Sky Is Falling” is another and amusingly that is precisely what Carl Icahn has done.
Over the course of 15 minutes, Icahn lays out his concerns about many of the issues we’ve been warning about for years and while none of what he says will come as a surprise (especially to those who frequent these pages), the video, called “Danger Ahead”, is probably worth your time as it does a fairly good job of summarizing how the various risk factors work to reinforce one another on the way to setting the stage for a meltdown. Here’s a list of Icahn’s concerns:
- Low rates and asset bubbles: Fed policy in the wake of the dot com collapse helped fuel the housing bubble and given what we know about how monetary policy is affecting the financial cycle (i.e. creating larger and larger booms and busts [17]) we might fairly say that the Fed has become the bubble blower extraordinaire. See the price tag attached to [18] Picasso’s Women of Algiers (Version O) for proof of this.
- Herding behavior: The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost.
- Financial engineering: Icahn is supposedly concerned about the myopia displayed by corporate management teams who are of course issuing massive amounts of debt to fund EPS-inflating buybacks as well as M&A. We have of course been warning about debt fueled buybacks all year and make no mistake, there’s something a bit ironic about Carl Icahn criticizing companies for short-term thinking and buybacks as he hasn’t exactly been quiet about his opinion with regard to Apple’s buyback program (he does add that healthy companies with lots of cash should repurchases shares).
- Fake earnings: Companies are being deceptive about their bottom lines.
- Ineffective leadership: Congress has demonstrated a remarkable inability to do what it was elected to do (i.e. legislate). To fix this we need someone in The White House who can help break intractable legislative stalemates.
- Corporate taxes are too high: Inversions are costing the US jobs.
Ultimately what Icahn has done is put the pieces together for anyone who might have been struggling to understand how it all fits together and how the multiple dynamics at play serve to feed off one another to pyramid risk on top of risk. Put differently: one more very "serious" person is now shouting about any and all of the things Zero Hedge readers have been keenly aware of for years.
Full video below.
* * *
Finally, here is Bill Gross also chiming in:
Gross: HY Fund closes exit doors. Who will get in if you can't get out? Risk off.
— Janus Capital (@JanusCapital) December 11, 2015 [19]
