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‘Riot in the Casino’ This Week?

December 2015

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Dec. 13, 2015 (EIRNS)—That the was the forecast of former Reagan Administration budget official David Stockman, referring to the Federal Reserve’s apparent intention to raise interest rates—for the first time in 10 years—in the teeth of an accelerating junk-debt and commodity price collapse.

Junk debt (junk bonds and leveraged loans) in the U.S. economy, as a reminder, totals at least $2 trillion in "assets" mainly held by banks, although many mutual, pension, and hedge funds are also involved. The junk-debt market decline has gotten very sharp in December, with interest rates on middling (CCC-rated) junk bonds hitting 17.25% Dec. 10 and shooting upwards. This debt is essentially impossible to refinance. In recent weeks the ratings agencies and banks have charted a "spike" in defaults and bankruptcies of junk debtors—concentrated in oil and gas exploration and related services—and warned the "spike" will become a "wave" in January-February.

Now, two junk creditors have gone under. Two debt-invested funds have liquidated in the past few days. The first was actually a mutual fund: the $1.8 billion, "well-respected" Third Avenue Capital on Dec. 10. Its founder Martin Whitman is designated a "legendary vulture investor." Just as that was being explained away ("it was investing in unrated debt"), the second went under on Dec. 11. It was Stone Lion Capital, a $2 billion hedge fund which was one of those investing in Puerto Rico distressed debt.

Some see a "Bear Stearns moment"—i.e., the bankruptcy of the two CLO-invested hedge funds in June 2007, which exposed the "non-containment" of the mortgage securities/derivatives meltdown. Vulture investor Carl Icahn gave a "keg of dynamite" interview on CNBC, saying "I believe the meltdown in High Yield is just beginning."

The Wall Street Journal wrote Dec. 11,

"The move is also a sign of how much the market for [all—ed.] corporate debt is deteriorating. "‘Investors have been dazzled that yields on bonds have climbed so high, even while default rates remained low,’ said ... a longtime junk-bond analyst. ‘Currently, though, the ability to sell a large position is especially poor. When that tension gets especially high, you can see something snap.’"

The century-old British colonial looter Anglo American, which was making "energy-junk" loans on a large scale, is suddenly at the brink of junk itself, with Moody’s downgrading it Saturday to one step above junk for all its divisions and placing a negative advisory on all of them. Credit default spreads on both Anglo American and Glencore rate them at more than a 50% chance of default, requiring $1,000 cash up front to insure $10,000 of their debt.