(Or “Credit Where Credit is Due”. Or maybe “Gilty as charged”?)
A few of the fine folks at Bloomberg decided to pen essentially the same story today.
Ladies first: Corporate Debt Protection Costs Climb Amid Depression Concern
Credit-default swaps on a benchmark index tied to below- investment grade companies in Europe reached levels considered distressed for the first time.
And at the end they toss in:
Credit-default swaps on U.K. gilts and U.S. Treasuries also rose to records, according to CMA Datavision. Five-year contracts used to hedge against losses on U.K. government debt increased 6 basis points to 113.5 and 10-year contracts climbed 9 to 116.5. Five-year contracts on Treasuries rose 2.5 basis points to a record 60.5, CMA prices show.
Sure, let’s bet on the entire Anglosphere facing sovereign default. Why not.
Next, the lone gentleman: Defaults May Beat Great Depression, Junk Bonds Say
Yields on speculative-grade bonds imply a U.S. default rate of 21 percent, higher than the record set during the Great Depression in 1933, according to John Lonski, chief economist at Moody’s Investors Service.
Not that junk bonds really “say” anything. But I think I see what he means.
I am sure there is nothing to worry about, because as everybody knows, bond traders are inherently irrational people who just like to throw money around at random.
Trump Entertainment Resorts Inc., the casino company founded by Donald Trump, had its ratings cut by Moody’s on Dec. 1 after announcing last week it would forgo a $53 million interest payment to conserve cash.
Question for any bond experts out there: What is the difference between “forgo an interest payment” and “default”, exactly? Just curious.
Finally, I have to link to this LOLFed piece again because the caption is magnificent.
Default is a complicated concept and the best answer is that it is defined in bond documents (bond resolution, trust indenture, etc.). Bond documents can have lots of covenants, especially when the debt is tied to a specific project (maintain a certain debt service coverage ratio, charge certain rates, and so forth), and violating any of the covenants can be a technical default. And then there is default as in not making a payment. Bondholders have different rights depending on the circumstances that are spelled out in the documents. (In municipal debt it gets even more interesting – if there is bond insurance in place, the bond insurer has all kinds of rights to step in, throw out management, etc. at certain stages. In some private placement offerings, bondholders can have a pretty active role in the fate of the project.) There may be provisions allowing for the restructuring of the debt in some way. I have not been following the Trump saga in detail, but my understanding from articles is that there is a 30-day grace period to get the situation resolved. It’s amazing anyone loans that man money.
Nemo, what are you invested in through this crises?
I am 75% cash. This is almost certainly a mistake; I should probably be more invested… But long or short, I do not know.
The remaining 25% is almost entirely in Berkshire Hathaway and gold.
I think the global economy “wants” to enter a severe recession or depression. I think governments world-wide are going to push very hard to try to stave off that outcome. (The Fed’s balance sheet expansion is one example. Obama’s stimulus is another.)
There are two possible outcomes. Either they will succeed, in which case Buffett is right and this is a once-in-a-generation buying opportunity for stocks. I own Berkshire in case this is right, because I think it will easily outperform the S&P 500 in any event.
The other possible outcome is that the authorities fail, and we get a depression anyway. When governments push on nominal prices (houses, wages, whatever) while real prices are falling, that means only one thing: currency devaluation. Hence my bet on gold via Jan 2011 GLD LEAPs.
Even in the latter scenario, stock prices might or might not fall very much; it depends on where and how hard the government decides to push. So being short in this market is also very risky, IMO.
Thanks for sharing, Nemo. I’m 100% cash at this point (I have some really old stock that isn’t doing all that well, but it’s a miniscule portion of my portfolio). I’m just wondering if that’s an OK place to be until at least early next year. I’ve been debating buying GLD, but it kind of feels nice to be away from volatility which the markets try and find some equilibrium. Perhaps I will buy some GLD to hold until early next year.