in the Stock Market? by David Stockman
| April 14, 2014
This Is Not
A “Healthy Correction”: The Mother Of All Financial
Bubbles Is Beginning To Crack.
Wolf Richter is one of the most astute
observers of our bubble-ridden/central bank perverted financial
scene around. His blog called Testosterone Pit is a daily
“must read” and more than that: its posts are
succinct, spritely, fact-based, conclusionary and cover
the global map with special insight on those debt ridden
houses of cards on the other side of the Pacific—-Japan
Wolf today issued a timely warning. Next week we will be
told by Wall Street stock peddlers that what are just having
a healthy correction and that it will soon be time to “buy
the dip”. Don’t believe them. We are perched
precariously at the top of one of the greatest financial
bubbles ever because it is global—-the handiwork of
world-wide central bank driven credit expansion and drastic
interest rate repression.
Just recall some of the numbers. At the turn of the century,
the US had about $25 trillion of credit market debt outstanding;
now it is pushing $60 trillion. About 14 years ago, China
had debt of $1 trillion; now its nearly $25 trillion. And
similar credit explosions occurred in much of the rest of
the world. It was all central bank enabled, and it caused
world wide investment booms and asset inflations which defy
every law of sound money and economics, and which cannot
be sustained indefinitely.
The bottom line of those destructive policies is that “cap
rates” are artificially low and so their reciprocal,
asset values, are enormously inflated. Likewise, nearly
zero money market interest rates in virtually every major
economy of the world have fueled the most fantastic expansion
of “carry trades” ever imagined.
As I have frequently pointed out, the short-term market
for repo and other wholesale funding represents the cost
of goods (COGS) for financial gamblers; its what they use
to fund their speculations in higher yielding currencies,
corporate debt, equities, and every manner of derivatives
and OTC concoctions that Wall Street trading desks can engineer.
So when the central banks drive the money market rates
to just 5-50 bps, they are offering ZERO-COGS to speculators.
This is a massive incentive to bid up the price of anything
that has a yield north of 50 basis points or a short-run
appreciation prospect of the same—in order to capture
the spread. This is what has turned the so-called capital
markets of the world into dangerous casinos. This is what
led speculators this week to gorge on $4 billion in Greek
debt carrying the lunatic coupon of just 4.75%.
The latter is not even a remotely plausible pricing of
the risk of a government with a 170% debt to GDP ratio—-
sitting atop an eviscerated economy that has shrunk by more
than 20% and has nothing much left except tourism, yogurt
plants and a 27% unemployment rate. Instead, it evidences
the fast money traders who swooped in to buy a 475 bp coupon
funded by free money from the central banks, and who did
so in the confidence that the ECB will do “whatever
it takes” to prop up the price of member country sovereign
Needless to say, the minute that the millions of gamblers
who have been enabled by the ZERO-COGS gift of central banks
lose confidence in their ability to prop up asset values,
the panic will set in. Then a great dumping stampede will
start. It will be the mother of all margin calls—-a
repeat of the dumping panic on Wall Street that occurred
in September 2008 when toxic mortgage securities which had
been funded by overnight repo were forced into fire sales
by wholesale lenders refusing to roll their repo.
Only this one will be much grander because the carry trades
have gone more global then ever before. Even pig farmers
in China have their sties loaded with copper because through
a roundabout trade it can be repo’d for cash.
Indeed, the global financial system is land-mined with
time-bombs–some hidden and others transparent. But
what is certain is that when huge distortions like the newly
booming market for dollar-denominated junk bonds being issued
by EM companies increasingly parched for cash craters, there
will be a ricocheting chain reaction that will spread far
As they might have said back in the day on Hill Street
Blues “don’t go out there, its too dangerous”.
Below, Wolf Richter reminds us of why.
“Biotech Stocks’ Rout Perplexes Analysts”
is how the Wall Street Journalheadlined the phenomenon.
The Nasdaq Biotech Index had plunged 21% from its intraday
high six weeks ago, to which it had ascended in an ever
steepening curve that culminated in a beautiful spike.
I wrote about that craziness at the time. My impeccable
timing was, unfortunately, sheer luck, but the Biotech
bubble had become so glaring that even I could see it
[NASDAQ 10,000 – Or Something]. So it’s perplexing
that analysts would be perplexed.
To add some color, the WSJ quoted ISI Group analyst Mark
Schoenebaum: “Horrible day in #biotech. I’m
frankly at a loss for an explanation. And it’s my
job to at least know why. Humbling day.”
He has been a stock analyst following
the Biotech sector since 2000. If he’d started three
years earlier, he would have seen the bubble build, pick
up momentum, go crazy, and pop in early 2000. He would have
seen Biogen dive so fast so far it would have knotted up
his stomach. He would have experienced the implosion viscerally.
And he might not have forgotten – though many analysts
have. But not having been through this before, he was “at
And something is cracking.
Of the 14 IPOs planned for this week
– the busiest since 2007 at the eve of the last implosion
– five were postponed, pending better weather. But
Farmland Partners started trading on Friday, and got plowed
under. An hour before the close, it was down over 10% from
its offering price of $14 a share. A last-minute rally brought
it up to $12.98, for a loss of 7.3%.
“People are pretty nervous,”
explained CEO Paul Pittman. “This is about building
long-term value in an asset class that for all kinds of
macro reasons we believe is certainly going to keep appreciating.”
That endlessly appreciating asset class is farmland.
The company, which expects to get taxed as a REIT, doesn’t
own or do much yet. But it’s gonna “acquire
high-quality primary row crop farmland … throughout
North America … upon completion of a series of formation
transactions.” It’ll own 38 farms with 7,300
total acres, mostly in Illinois.
Farmland has been hot for long time.
Over the last 10 years, farmland prices
in Iowa soared 282%, in Nebraska and South Dakota 326%.
Over the last 6 months, prices still rose 7.2% in South
Dakota, but in Nebraska they stalled, and in Iowa they started
to fall, now down 2.8%.
Farmland has been through this before:
in the 1980s, the bubble burst, and farmers who’d
borrowed against their land at nosebleed valuations ran
into trouble because crop prices couldn’t make the
equation work, and they couldn’t service their debts
and had to sell, which triggered more bouts of forced selling
which drove prices down further and took rural lenders down
with them. The scenario of any bubble that is unwinding.
It wreaked havoc on rural America.
That Wall Street finally pushed a farmland REIT, willing
to buy farmland at peak valuations, into the hands of
retail investors, after a huge multi-year run-up in stocks
and farmland, should send people scurrying out of the
“But it’s not a bubble.”
That’s what Savita Subramanian,
Head of US Equity and Quantitative Strategy BofA Merrill
Lynch Global Research, wrote on March 21. Then she went
on to describe what exactly it was, namely a bubble:
We have witnessed a recent surge in
media attention on the topic of equity bubbles, citing various
signs of evidence: Biotech stocks have risen 300% over the
past five years, and Internet stocks have returned more
than 400% over the same period. And most IPOs this year
have been for unprofitable companies trading at high valuations….
The recent sell-off in high-fliers has investors worried
that the deflation of this “bubble” could take
down the overall market, similar to what occurred in 2000.
But no. “We think not,” she wrote. BofA Merrill
Lynch makes lots of moolah pushing overpriced stocks to
exuberant retail investors who’ve been driven by
the Fed’s interest rate repression into the razor-like
claws of risk. And besides, “the frothy spots appear
well contained,” she added in central-banker lingo.
And then the old saw: “Equity bubbles rarely happen
when everybody is talking about bubbles.”
In late 1999 and early 2000, just before the bubble imploded
spectacularly, “bubble” was the only thing
everyone was talking about. Everybody tried to ride it
up all the way and then get out. With predictable results.
Repeat in 2007 and 2008.
That’s what analysts are doing. They see the bubble,
and they benchmark it against the bubbles that blew up
in 2000 and 2007, and they pull rationalizations out of
thin air why this time it’s d…. Oops, they’re
not using the d-word, which would make them the laughing
stock of TP readers. They’re using logical-sounding
arguments that border on superstitions – “Equity
bubbles rarely happen when everybody is talking about
bubbles” – to explain why it’s different.
Exuberant retail investors are expected to swallow it
hook, line, and sinker.
Meanwhile, the Smart Money is selling.
This week, it was once again private-equity mastodon
Blackstone Group which dumped one of its LBOs, hotel chain
La Quinta, into the lap of mutual funds and retail investors
via an IPO. Blackstone has been busy dumping its LBOs.
Other PE firms have been busy too. Valuations are enormous,
and PE firms need months, sometimes years, to get out
from under their priced possessions. So they plan ahead.
And they’ve been selling everything that isn’t
nailed down for over a year.
And hedge funds are bailing out of equities.
Still in an orderly manner.
“We saw net exposure come way down,” explained
Jon Kinderlerer, managing director at Credit Suisse’s
prime brokerage business that deals with hedge funds.
Hedge fund exposure to stocks in the US is “actually
at the lowest level since August 2012,” during the
euro turmoil before ECB President Mario Draghi saved the
day with his whatever-it-takes pledge. “Funds have
trimmed exposure, and they’ve added hedges.”
The sharpest cuts occurred over the past month, he said.
Hedge funds are “battening down the hatches to weather
Buried in the IMF’s Global Financial Stability
Report is a doozie of a chart. It depicts the bubble in
covenant-lite and second-lien loans, the same that helped
blow up the banks in 2008. Only this time, they’re
even worse. Read….. Biggest Credit Bubble in History
Flashes Warning: ‘Seek Cover, Implosion In Sight’