Everything Is Great
The Market Bull 2019

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The Market Bull – August 6, 2019

The major averages closed with large gains erasing almost all of yesterday’s losses as once again nothing matters, and everything is great.

There is little economic data today and the trade war has been officially dubbed a trivial side show. What isn’t trivial is the amount of debt in the world and its rate of growth in the post crisis period since 2009. Growth that featured all manner of “clever” financial engineering involving leveraged loans, various iterations of C “something” O, “Covenant Lite” and other looming financial disasters as we are about to see firsthand. But the question is just who holds this 3.2 trillion plus worth of engineered paper destined for disaster? In the case of leveraged loans, no one really knows as they are not regulated, after all they are loans and not securities. Then there’s 13 trillion in global negative yielding securities, some of it junk or high yield. Caught in the crossfire are insurance companies, pension plans, their participants and others trying to supplement their meager retirement income. Banks and nations are also heavily exposed as the following table shows.
Holder of Leveraged Loan or CLO Loans, $ billions CLOs, $ billions Total, $ billions

It’s fascinating how murky the data is around this $3.2 trillion pile of leveraged loans and Collateralized Loan Obligations or CLOs. And the Bank Of England or BOE is not shy about pointing it out, such as:
“Complete data are not available for some non-banks, and so values have been estimated based on partial data.”
“The grey segment [“unallocated” = $224 billion] marks the areas of most uncertainty”.
“For hedge fund holdings of leveraged loans and CLOs, we scale up holdings reported to UK authorities by non-EEA managed alternative investment funds to reflect the size of the global hedge fund universe. This means these estimates are particularly uncertain.”
“Data for insurers largely refers to US entities. A proportion of holdings are through products that are offered by insurers to outside investors.”
The BOE’s efforts to shed light on leveraged loans has at least succeeded in revealing just how much murk there is in this end of the industry. And it is doing away with the illusion that banks are mostly off the hook when leveraged loans and CLOs blow up.

Standard and Poors 500 Index closed at: 2,873.22 up 28.48
NASDAQ finished the day: 7,816.92 up 91.27
Gold ended trading at: $1,482.30 up $5.80


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