LBO

The central banks of the world are massively and insouciantly pursuing financial instability. That’s the inherent result of the 68 straight months of zero money market rates that have been forced into the global financial system by the Fed and its confederates at the BOJ, ECB and BOE. ZIRP fuels endless carry trades and the harvesting of every manner of profit spread between negligible “funding” costs and positive yields and returns on a wide spectrum of risk assets. Stated differently, ZIRP systematically dismantles the market’s natural stability mechanisms.

According to just released data by Murray Devine, the Median Ebitda multiple for buyouts has exploded to nosebleed levels, rising by over one full turn of EBITDA since 2013 alone, and at 11.5x in the first half of 2014 is nearly 2x higher than during the last LBO bubble peak in 2008, when the average company was taken private at a conservative 9.6x EV/EBITDA.

Just when you thought that nothing could be worse than bubble blindness of Greenspan and Bernanke - along comes the Yellen doctrine of “resilience”. Its dangerous Keynesian blather, and far worse than Greenspan’s feigned agnosticism which held that the Fed does not have the capacity to recognize financial bubbles in the making and should therefore mop them up after they burst. The Maestro never did say exactly what caused the massive and destructive dot-com and housing bubbles which occurred on his watch - except that Chinese factory girls stacked 12-to-a-dorm-room apparently saved way too much RMB. By contrast, Yellen’s primitive Keynesian mind knows exactly what causes financial bubbles. She has now militantly asserted that bubbles are entirely an irrational impulse in the private market and that the price of money and debt has absolutely nothing to do with financial stability.

Janet Yellen is an officious school marm. She constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth - embodying the sweat of labor, the consumption of capital and the fruits of enterprise - to magically expand beyond what the free market would generate on its own steam. Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim. Perhaps she would like to put in a bid for one of these homes...

• Facebook Researchers Manipulated News Feeds in 2012 Study (BBG)
• Argentina at Brink of Default as $539 Million Payment Due (BBG)
• Hedge fund correlation risk alarms investors (FT)
• As China Flexes Muscle, Obama Frets Over Rival’s Weakness (BBG)
• As caliphate declared, Iraqi troops battle for Tikrit (Reuters)
• Dubai Caps Worst Month Since 2008 as Real Estate Stocks Tumble (BBG)
• Russian Advisers Ready Iraq to Use New Combat Aircraft (BBG)
• Blackstone Readies Big-Bet Hedge Fund (WSJ) - so what was GSO?
• Pope says communists are closet Christians (Reuters)
• Thomson Reuters revising FX trading standards (Reuters)

• Iraqi Drama Catches U.S. Off Guard (WSJ)
• Al-Qaeda Offshoot on NATO Border Threatens Turkish Rally (BBG)
• It's just the snow, people: U.S. Economic Recovery Looks Distant as Growth Lingers (NYT)
• Freed Taliban leaders may remain in Qatar beyond one-year travel ban (Reuters)
• BNP Paribas Executive Chodron de Courcel to Quit Post (WSJ)
• Greenmail is back (WSJ)
• Facebook Places Multiple Bets to Win Messenger Wars (BBG)
• ECB easing to benefit Ukraine, Russia corporate bonds (Reuters)
• Rome Shows the World How Not to Run Bike-Sharing Program (BBG)

Today you can’t go 10 minutes without tripping over an investment manager using the phrase “Minsky Moment” as shorthand for some Emperor’s New Clothes event, where all of a sudden we come to our senses and realize that the Emperor is naked, central bankers don’t rule the world, and financial assets have been artificially inflated by monetary policy largesse. Please. That’s not how it works. That’s not how any of this works.

Monetary central planning at the zero bound embodies a destructive internal contradiction. It inherently generates rampant speculation in real estate and financial assets because ZIRP massively subsidizes the cost of carry. At the same time, its practitioners are institutionally disposed to bubble denial because they falsely believe that their policies are what is keeping the real economy advancing - even if currently it is at a sub-normal pace by historical standards. Without fail, therefore, monetary central planners keep their feet on the accelerator to the very end, boasting that the “in-coming data” shows the macro-economy approaching the nirvana of full-employment. What they are actually doing, however, is driving the financial system to unsustainable extremes of valuation and speculation - and eventually to a crash landing. We have had two of these processions of the lemmings - that is, Fed driven cycles of bubble inflation and bust - already in this century. Now we are at the asymptote of the third.

Wall Street is back in the business of lending money at the Fed’s gifted rate of zero plus a modest 80 basis point spread - so that the fast money can buy CLO paper on 9 to 1 leverage. There is your triple shuffle. It didn’t work out last time, but that doesn’t matter because the game is obvious. After enough buying on Wall Street’s triple leverage, junk loan prices might temporarily rebound. Then the brokers will put out the call to retail: The junk loan asset class is rebounding - its time to come back. For the final shearing, that is!

CNBC must be reeling this morning as probably the highest-rated rivalry among hedge-fund managers has ended. As The WSJ reports, the hatchet was buried on Thursday. Mr. Ackman spoke with Mr. Icahn's assistant on April 24 saying, "I am calling to forgive Carl," according to Mr. Ackman. Mr. Icahn, 78 years old, returned the call and told Mr. Ackman, 47, that "it is a blessing to forgive," Mr. Icahn said, "and I forgive you." The acrimonious activists thus closed the door on one of the ugliest spats in financial market history as forgiving being called "a crybaby" and forgetting being labelled "a dishonest man" has been trumped by. as Ackman notes, the "much greater possibility that we are on the same side than the opposite."

The bankruptcy of Energy Future Holdings, aka TXU, aka the largest LBO ever has been long in coming. As we previewed it most recently in September of last year, "if there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings... the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away." It turned out it was more like months away, but it finally arrived, and moments ago, TXU finally succumbed to (lack of) cash flow reality, when it filed for a prepackaged Chapter 11 bankruptcy on Tuesday morning after months of negotiations with creditors aimed at speeding the restructuring of the private-equity backed utility's debt load of more than $40 billion. While it is unclear just how much total debt the company will ultimately restructure, it is likely that the final number will be greater than Enron's, making this also the largest ever non-financial bankruptcy in history.

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.

So far we have experienced 7 million foreclosures. Beyond that there are still 9 million homeowners seriously underwater on their mortgages and there are millions more who are stranded in place because they don’t have enough positive equity to cover transactions costs and more stringent down payment requirements. And that’s before the next down-turn in housing prices - a development which will show-up any day. In short, the socio-economic mayhem implicit in the graph below is not the end of the line or a one-time nightmare that has subsided and is now working its way out of the system as the Kool-Aid drinkers would have you believe based on the “incoming data” conveyed in the chart. Instead, the serial bubble makers in the Eccles Building have already laid the ground-work for the next up-welling of busted mortgages, home foreclosures and the related wave of disposed families and social distress.

The Herbalife drama - perhaps the biggest billionaire pissing contest of 2013 - just got excting again, following FT news that a criminal probe has been launched into Herbalife. "The US Department of Justice and the Federal Bureau of Investigation are investigating Herbalife, the multi-level marketing company that hedge fund manager Bill Ackman has alleged is a pyramid scheme, according to people familiar with the matter. The criminal investigation by the FBI and US attorney’s office in Manhattan raises the stakes for Herbalife, which is already facing civil inquiries from multiple government agencies that are looking into the Los Angeles-based company and its associated network of independent distributors."

The world’s official economic institutions are run by people who believe in monetary fairy tales. The 70 words of wisdom below from IMF head Christine Lagarde are par for the course. She asserts that a new jabberwocky expression called “low-flation” is the main obstacle to higher economic growth in Europe and the DM areas generally and that it can be cured by more central bank money printing.