Investment Grade

As we previously noted, liquidity is there when you don't need it, and it promptly disappears once it is in demand. Consider it "cocktease capitalism." If liquidity lasts longer than 4 hours, call the CFTC because you may be experiencing a spoof. Right now, the ultimate spoof is setting up as the credit default swap market collapses, and a global bond market margin call is just around the corner.

"The growing size of the asset management industry may have increased the risk of liquidity illusion: market liquidity seems to be ample in normal times, but vanishes quickly during market stress. This liquidity may be artificial and less robust in the event of market turbulence." So what's the solution? Unfortunately there isn't one. Instead, fund managers are simply resorting to emergency liquidity lines with banks which is just another manifestation of using cheap cash to delay the Schumpeterian endgame scenario which, if ever allowed to play out, will finally purge capital markets, reset the system, and free the world from the nefarious clutches of central bankers gone mad with delusions of Keynesian grandeur.

Stocks may be ignoring the 'dollar' and liquidity more broadly (at least as far as repurchases are concerned) but the continued stress in the eurodollar world has had an accumulating effect in some places. Primarily that has been shown in the once-thriving junk space, including more illiquid “products” like leveraged loans... By and large, there seems to be renewed concerns about liquidity, economy or both.

Is Deustche Bank the next Lehman is likely the wrong question to be asking. Is Lehman the template for European banking may be more to the point. Take it from the guy that called the Lehman debacle 5 months before the fact.

The Fed sees no risks of bubble trouble because they are looking at it all from the 2008 perspective. That is completely wrong-headed; if there is a “next one” it will have nothing to do with subprime mortgages, or even mortgages and real estate. Everyone seems to simply assume that the subprime problem ended in 2008, if only by crash. That is true but only of mortgages. Deleveraging is myth as debt has still expanded, and greatly, just not in the same exact places. There are certainly auto and student loans that have exploded exponentially, especially in subprime categories, but if there is another credit bubble now, the third, it is undoubtedly corporate debt.

U.S. companies announced $141 billion of new stock buyback programs last month and $243 billion of new M&A deals. Both figures are all-time records, and according to bubblevision are further evidence that CEOs are bullish on their companies and the economic outlook. You might say that. Then, again, it might put you in mind of swarming moths heading for a light bulb. The baleful truth is this. In its arrogant and misbegotten seizure of all financial power, the nation’s central bank has turned the C-suite of corporate America into a destructive agent of bubble finance. That’s ‘dumb money’ with a vengeance.

Last month, Chicago saw its debt cut to junk at Moody's, triggering billions in accelerated payment rights and jeopardizing efforts to improve the city's finances in the face of a budget gap that's set to triple over three years. Citi has more on the dreaded "downgrade feedback loop."

Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.

In spite of all of the 'apparently good' outcomes of Cuba’s experimentation with equal sharing of wealth; in recent years Cuba seems to be moving away from the planned economy model. Instead, it is moving to more of a “mixed economy,” with more entrepreneurship encouraged. While we don’t have explanations for all of the things that are going on, here are a few insights on what is happening...

On Tuesday, Deutsche Bank agreed to a $55 million SEC settlement tied to allegations it hid billions in losses by mismarking its crisis-era derivatives book. The bank has always contended its valuation methodologies were sound. Here is the real story...

Following an Illinois Supreme Court ruling that struck down a pension reform plan aimed at closing a $100 billion funding gap, Moody's downgrades Chicago to junk, giving the city the dubious distinction of being the only major city "in recent history" to carry such a low rating other than Detroit. Chicago now faces accelerated payments to creditors of more than $2 billion.

Liquidity is plentiful when you don't care about it and scarce when you need it most

Morgan Stanley breaks down the buyback-equity rally relationship while WSJ flags "big borrowing" by both corporations and investors. In short: corporate debt issuance is at record levels and so are buybacks, stock prices, and margin accounts. When the cycle finally turns, look out below. 

The results of the latest FOMC meeting confirm that most of the media and investor communities don't get the joke on Fed policy since the crisis.  No change in '15

"An 'oil-debt nexus' could create a vicious circle whereby overindebted companies pump more oil to ensure they can pay interest on their loans, adding to the current global oil glut, and further depressing energy prices," WSJ notes, citing a BIS report. The interplay between the industry's growing debt pile and falling prices is a microcosm of the deflationary dynamic that’s taking hold in the macroeconomy and that serves, in Citi's words, to destroy creative destruction, creating "zombies" along the way.