Record U.S. junk bond sales and a rally in leveraged loans are chipping away at the $1.2 trillion wall of maturing debt that’s threatened to cause a surge in defaults…
…Market watchers from Fridson to Bank of America Merrill Lynch strategist Oleg Melentyev to Robert Khuzami, the director of enforcement at the U.S. Securities and Exchange Commission, have used the term “maturity wall” to describe the wave of bonds that need to be refinanced in coming years…
To translate from the Banksterese: companies are up against a wall of debt which is coming due in 2010 and 2011. This debt will cause a lot of companies to fail – so, they need to pay off the debt. Except they can’t – so, they’re selling junk bonds to refinance it.
They are refinancing low interest debt with high interest debt.
Its like a credit card balance transfer for idiots. Or, in this case, for the idiots who run our larger corporations and are only hoping they can kick the can down the road until they get their golden parachute.
All of this will be fine – if the economy goes on a massive boom and allows these companies to earn enough money to not only keep up with current expenses but also provide the massive amounts of money that will be needed to redeem these bonds at maturity. And if the economy doesn’t go on a rampage?
Then, they’re screwed. Won’t be able to redeem – will have to either refinance at an even higher rate, or go belly up.
This is the sort of thing I see which convinces me that we’re not in a recovery. We are in a speculative bubble fueled by easy money from the Federal Reserve and the US Treasury – as well as central banks around the world. Heard today that China will post 11.7% growth – its either a complete fraud (ie, made up numbers by Chinese apparatchiks who don’t want to bear ill tidings to the Central Committee), or a massively overheating economy which cannot sustain itself. Its like that all over the world – growth fueled by funny money.
Until the proof comes crashing down ’round our ears, I’ll have no way to show the boosters of this that they’re fools. You can never convince a speculator that he’s got it wrong until he’s selling apples on the street corner, as it were. But this cannot go on – at some point, the system will hit overload and the crash will be spectacular. Today, tomorrow, next week, next month, next year – one day, certain, it will happen.
I tend to think that once we get in to the junk bond rally phase, we’re probably not too far off the crash.
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