The Collapse Begins

The large US junk debt market has been crashing for a month now, with spreads/rates reaching 2009 crisis levels of up 17% interest rates. That's amazing in itself. See Two Charts That Show the Financial Crisis is Here.  Zero Hedge noted today that the last time Junk Bonds hit 17% interest rates, Lehman filed for bankruptcy (on Sept 15, 2008).

They went on to muse:

We can't wait to find out if indeed Yellen's first rate hike in 9 years this Wednesday unleashes a Lehman-like neutron bomb that leads to the full collapse of the junk bond market first, and then the shockwave spreads across all asset classes leading to the same financial devastation witnessed at the end of 2008, unleashing the longest period of "free capital markets" central planning the world has ever seen.

It might not be THAT dramatic or could it?  Just think about the meaning of 17% interest rates for a large portion of smaller US businesses-- in a zero interest rate world no less! These businesses are creating the jobs.. Large corporations can still borrow at 3 or 4% but big corporations don't create the jobs. And when they borrow, they are just buying back their stock, NOT hiring employees or investing. This is partly why there has been a poor recovery since 2009--no "real" business investment.

The reason for this current junk bond credit crunch is that liquidity and the economy are contracting. Those two things go hand in hand. All year, retail sales have been some of the worse seen in 30 years outside of the most severe recession of 2008. Durable goods orders are contracting, ISM manufacturing went below 50% last month. Business inventories are ominously rising and portend more production slowdowns. US exports are declining, world trade is declining, Manufacturing is in recession both here and abroad. All the commodity producing countries are in recession including Russia and Brazil. Also, Canada and Japan are in recession. Europe is near recession.

The US manufacturing recession will, in all likelihood, morph into a general recession and nearly certainly so if credit (and then equity markets) continue to crash. Rising business interest rates, in addition to the sinking business environment indicated above, is solidly recessionary.

Against this background, the Federal Reserve and Janet Yellen have insisted that the time is right to raise rates. They have a near-perfect record of being completely wrong, out-of-touch and are set to tighten monetary conditions at the worse possible time. Like the rest of Washington, they don't know what they are doing, they have no real world experience and they are so incompetent that they wouldn't make it in the private sector.

A Fed funds rate rise or not, it appears that, absent a reflation of oil and other commodity prices, sovereign debt of commodity producers will be junk and in distress, ie., Brazil debt will soon be downgraded with a potential EM contagion from there. Already Russia, Argentina, Ukraine, Venezuela, Brazil are facing crises with the potential of defaults. As is the likes of Glencore.

It's not yet apparent, but one or more of the European banks may be the next Lehman. Notice how Credit Suisse, Deutsche Bank and lately Morgan Stanley are cutting dividends, repeatedly raising capital and firing employees -- and that's before the environment is in crisis. Imagine what it will be like when there IS a crisis?

The Federal Reserve will revert to the only thing that they know how to do:  easing and money printing.  But money printing has already been discontinued as it no longer works.  They could print but the money just shows up on a balance sheet as "excess reserves"with some leakage into financial markets.

For it to make it into the real economy, money must be "lent into existence." I think ZIRP or NIRP will be a piss in a bucket compared to a tsunami of bad debt/defaults that may appear. Confidence is a delicate thing.

All this because the world abandoned the gold standard which anchored currencies to something limited that governments (and Central bank PhDs) cannot pervert. That anchor kept budget deficits and trade deficits limited. Instead, fiat money builds up huge imbalances -- both budget deficits and trade deficits that blow up. And we're not even mentioning the excess of leverage of all types.

One day, out of the ashes of world destruction, a new generation will re-establish a gold standard once most of world's "money" has gone to "money heaven." It's possible that world population will be much lower too as part of that destruction.