Biggest Credit Bubble in History Flashes Warning – ‘Seek Cover’

[marmar]

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.


Hidden in the IMF’s just released 188-page Global Financial and Stability Report is a doozie of a chart that screams not only “credit bubble” but also flashes a red warning sign: “seek cover, implosion in sight.” It depicts US issuance of covenant-lite loans and second-lien loans since 2001, including their phenomenal bubble that so spectacularly collapsed in 2008, and the even greater bubble currently underway – with an equally spectacular future.

Covenant-lite loans, which eliminate many of the protections that lenders normally require, allow over-leveraged junk-rated companies to pile on even more debt when they would normally no longer be able to do so. A key benefit for the Private Equity firms that own them: PE firms make a big part of their profit by having their portfolio companies borrow money, but not for expansion purposes or other productive uses. Instead, PE firms suck that cash out the back door through special dividends, fees, and other devices. When the portfolio company pops, the PE firm conveniently has the cash, and the lenders eat the loss.

To protect themselves, lenders normally force borrowers into covenants that prevent these and other shenanigans. But not anymore. Lenders, driven to near insanity by the Fed’s interest rate repression, are caught up in an all-out chase for yield and don’t look at anything else, and to get that minuscule extra yield, they take on risks, any risks, no questions asked, and to heck with future losses, and they hold their noses and close their eyes and pick up the worst crap, and then find ways of stuffing those risks into your mutual fund.

It’s a Feeding Frenzy Out There.

The longer it goes on, and the more of this reeking debt with a high probability of default is piling up on the books of banks and other lenders, the more damaging the implosion will be. And so covenant-lite debt has become a flashing red light of a credit bubble in its final throes. A record $238 billion were issued in 2013, according to Thomson Reuters. Over 50% of the market, another hair-raising record. ...............(more)

http://www.nakedcapitalism.com/2014/04/wolf-richter-biggest-credit-bubble-in-history.html

[L0oniX]

1. Hopefully we will see more warnings about this from other sources while regulation is a topic.

[Electric Monk]

2. A quick google for "Covenant-lite loans" found some coverage on CNBC, WSJ & Forbes

Few-strings-attached loans at record levels
http://www.cnbc.com/id/101754954


Shining a Light on Covenants
http://www.wsj.com/articles/heard-on-the-street-shining-a-light-on-covenants-1405938538


Leveraged Loans: Breakout July - Covenant-Lite Share of European Debt Soars
http://www.forbes.com/sites/spleverage/2014/08/01/leveraged-loans-breakout-july-covenat-lite-share-of-european-debt-soars/

[jeff47]

3. Uh....

But not anymore. Lenders, driven to near insanity by the Fed’s interest rate repression

Uh....The fed's supposed to fight inflation via interest rates.

Show me the inflation that they are ignoring, and we can talk about "repression".

[former9thward]

4. Go into a grocery store and look at the prices.

Also look at the package sizes which have shrunk.

[jeff47]

5. Anecdotes != Data.

You could go into a non-grocery store and look at the prices on durable goods. They've gone down.

Again, show the data and then we can talk about "repression" of interest rates.

[former9thward]

8. BLS

Over the last 12 months the food index rose 3.0 percent and the index for all
items less food and energy increased 1.7 percent

The BLS ignores package shrinkage so no one has that data. If you have not noticed it you are not a food shopper.

http://www.bls.gov/news.release/pdf/cpi.pdf

I am not the poster talking about rate repression. I don't care about that but I do know there has been a great deal of inflation in food and so does anyone who has to pay for it.

[jeff47]

9. Good thing food is the only thing anyone ever buys!!!

Oh wait.....

http://research.stlouisfed.org/fred2/graph/?g=180W

Change in seasonally-adjusted CPI for urban consumers since 2006. Please point to the massive increase in inflation.

I am not the poster talking about rate repression.

No, but it's a demonstration that the person doing that talking doesn't know what they are talking about.

Little like someone talking about calculus after claiming 1+1=17. Probably should wonder about their claims about calculus.

[former9thward]

17. A person who does not believe there has been any food inflation

doesn't know what they are talking about. Any poster who buys food knows that.

[jeff47]

18. Ah, time to dig out the strawman for incineration.

A person who does not believe there has been any food inflation doesn't know what they are talking about. Any poster who buys food knows that.

Quote where I said there has been no food inflation.

My entire point is food inflation is only a part of inflation. We're paying more at the grocery store, and paying less at the pump. And paying less at several other places.

Your claim was inflation was shooting up. Not only food inflation.

[former9thward]

19. Can't do without food.

You can lower your standard of living for almost everything else that inflation measures. Food is the most important. Which is why the government loves to leave it out of cpi calling it "volatile". Its not volatile, it always goes up.

[jeff47]

20. Food is in CPI.

http://www.bls.gov/dolfaq/bls_ques3.htm

What's the first item in the CPI basket? Food and beverages.

You can lower your standard of living for almost everything else that inflation measures.

Please explain how I am supposed to commute to work in a city with public transportation that only runs for 6 hours a day so that I can "lower my standard of living" and not use any gasoline.

Perhaps I should "lower my standard of living" to a cardboard box in the office parking lot.

But of course I could never lower my standard of living by buying different food. Nope, must be all highest quality certified organic produce and 100% Kobe beef.

Its not volatile, it always goes up.

Food Inflation:
http://research.stlouisfed.org/fred2/graph/?g=182U
It does not always go up.

[former9thward]

21. You are using silly extreme examples.

Unlike people in the real world. People who find their living expenses going too high can go down in the type of housing or get roommates. Happens every day of the week in the real world. People whose fuel expenses go up can get smaller vehicles, a motorcycle, defer recreational travel, public transportation, etc. Happens everyday of the week in the real world. People can go to Goodwill for clothing and furniture. Happens everyday in the real world.

Of course you claim there is no inflation so people don't need to do any these things. Just listen to every statistic the government puts out telling you every thing is fine and to move on.

Food inflation stats do not measure shrinkage. Next you will say that does not exist.

[jeff47]

23. No, actually I linked to real economic data.

People whose fuel expenses go up can get smaller vehicles, a motorcycle, defer recreational travel, public transportation, etc.

Because people strapped for cash have an easy time getting a loan on a new car.

You also ignored that 6-hour public transit example. It's not silly. It's the actual bus schedule for my city. Buses run for 6 hours a day.

If we're going to talk about "ignoring" possible changes, how is it that reducing one's food bill is impossible? You gave examples of people giving up luxuries in order to afford housing, gas, etc. They were people living in a situation where they could give up those luxuries. You can't add a roommate when the apartment is already full. Yet these same people were eating nothing but the cheapest food?

Of course you claim there is no inflation so people don't need to do any these things.

Hrm...If only I had linked some charts showing that there actually was inflation. Just that it wasn't very large....

Food inflation stats do not measure shrinkage.

Yep, they do. They're by weight or volume, not per-prepackaged-container.

[TampaAnimusVortex]

7. Here you go.

If you calculate inflation as the government did prior to the change in the 1990s, we have been averaging a bit over 5% for a while now.

By 1980s standards, its almost 10%

http://www.shadowstats.com/alternate_data/inflation-charts

?hl=ad&t=1427212497
?hl=ad&t=1427212497

[jeff47]

10. And even with the conspiracy minded Shadow Stats

Did you notice that the end of the line is going down?.

Big secret inflation that is not even shown in their ShadowStats.

[TampaAnimusVortex]

11. You do know they use standard government methodology dont you?

How can it be a conspiracy if they use the governments own methods? This IS in fact what the inflation rate would be using those older methodologies.

What they do now is subtract out energy and food from the rates, so you assume that's a more correct way to determine inflation? Crazy.

Yes, the current trend is down... from 10% to 8%, or 6% to 3% depending on rather you take the 80s or 90s version.

Only an idiot would believe the numbers the government is handing out now as being the real inflation numbers. They have a vested interest in reporting inflation as low as possible - so they can print more money.

[jeff47]

14. No, they claim the changes in methodology were done

to hide "the truth".

What they do now is subtract out energy and food from the rates, so you assume that's a more correct way to determine inflation? Crazy.

Food and energy are in the CPI. You'll notice the BLS's FAQ lists "Food and Beverages" as the first item in the basket.

"Core inflation" removes food and energy from the CPI basket.

If what you claimed were true, the graphs would not have the same basic shape with a different Y value. Food and energy are volatile, and month-to-month they would be dragging inflation either up or down. That would produce a graph with a completely different shape, not just a different Y value.

Specifically, it looks like this: http://research.stlouisfed.org/fred2/graph/?g=181h

ETA: Here, let me put them next to each other. Blue is core inflation, Red is CPI (Headline) inflation. http://research.stlouisfed.org/fred2/graph/?g=181j

"Core inflation" is useful when you are making long-term decisions because of the volatility of food and energy. Oil being extremely cheap right now skews "headline" inflation down. But it will not remain cheap forever.

If you are making short term decisions, you do not want Core Inflation, you want something more like CPI.

Only an idiot would believe the numbers the government is handing out now as being the real inflation numbers. They have a vested interest in reporting inflation as low as possible - so they can print more money.

Yeah, no conspiracy theories here!

[TampaAnimusVortex]

15. So you still havent explained the results...

If omitting food and energy figures shouldn’t affect the Y overall, why then is Y different overall? Exactly what has been done to suppress the appearance of inflation?

The standard line about energy and food being volatile may play well for the guy with the printing press, but for the people actually buying food and energy, that inflation is as real as anything.

[jeff47]

16. Actually, I have. You're still not understanding.

If omitting food and energy figures shouldn’t affect the Y overall

This is wrong.

Food and energy are sometimes expensive. They are sometimes cheap. That results in moving Y up or down when you have a graph of headline inflation. Right now, cheap oil is pulling Y down. Expensive food is pulling Y up. Oil is overwhelming food at the moment.

When you exclude food and energy, you lose that pull. As a result, excluding food and energy gives you a radically different value for Y.

Instead, your graphs show an almost constant difference in Y. Your Y exactly mirrors the Y you claim to be fraudulent, plus about 2. With food and energy bouncing up and down, you're not going to get Y+2. You're going to get Y+6 one month, and Y-1 the next, and Y-6 the one after that.

Exactly what has been done to suppress the appearance of inflation?

What has been done is a change in the "basket" of goods and services in CPI. We didn't buy nearly as many electronics in 1980. Or even 1990. And changes in fuel efficiency rules mean an individual consumer is buying less gas - a 40mpg hybrid doesn't need as much as a 12mpg station wagon with wood paneling.

So BLS occasionally changes the contents of the basket to match changes in purchasing patterns. People looking to bolster their cause will claim these changes were actually done to hide something.

The standard line about energy and food being volatile may play well for the guy with the printing press, but for the people actually buying food and energy, that inflation is as real as anything.

Which is why I explained when each metric is useful. Long term, you want to look at core. Short-term, you want to look at CPI.

Setting the Federal Funds Rate is a long-term decision. How many eggs I buy this week is a short-term decision.

[Xolodno]

22. meh...give it up.

You can't explain Econ and Stats to people who insist on truthyness.

Inflation is going down. End of Story. Fat Lady is singing. Bottom of the 9th...LA Kings aren't in the Stanley Cup Final.

People are confusing their lack of income and diminishing purchase power due to a Lorenz Curve that makes Chris Christie look thin with "Inflation".

They can't get it through their skulls...it isn't the prices....its their income.

[TampaAnimusVortex]

13. Also other measures of inflation show it way higher than government stats.

Wow, that's a pretty big conspiracy!

BIG MAC INDEX REVEALS TRUE INFLATION
http://www.theburningplatform.com/2014/08/31/big-mac-index-reveals-true-inflation/

Who Is Telling The Inflation Truth? The Government Or Mickey Mouse
http://www.zerohedge.com/news/2015-02-24/who-telling-inflation-truth-government-or-mickey-mouse

[BlueJazz]

6. I bring up this kind of stuff when I hear people say: "Let the free market alone..they are capable..

...of regulating their own business"
Bullshit, when you have greedy sociopaths determining what is fair and just, the only thing they're concerned about is that new Ferrari they've had their eye on.