Blankfein. Icahn. Dalio. Some of the biggest names in finance are sounding alarms. Yet it was industry titan Blackrock‘s recent move to quietly exit US markets that bankers took as the ultimate red flag. Is Larry Fink sending a lifeboat to the world‘s most vital economy as the majority remain complacently anchored?
*"When the world‘s biggest asset manager starts reallocating away from America, you better pay fcking attention," exclaimed hedge fund manager Mark Spitznagel. His Universa Investments scored legendary 4144% returns betting on crisis conditions during COVID. "And Fink is no fool – he seems to be warning us winter is coming."**
Spitznagel is positioned for apocalyptic scenarios again as cracks splinter across debt-laden US markets. For those paying attention, the signals are ominous reminiscent of 2008 albeit with potentially more catastrophic consequences.
Years of loose Federal Reserve monetary policies have anesthetized reality while inflating the largest financial bubble in human history. Now the free lunch is ending as rates spike, debts overwhelm, and pundits predict dire outcomes. Blackrock seems first to evacuate an increasingly vulnerable Titanic economy. The lifeboats may soon be overflowing.
This expert analysis examines the risky foundations now wobbling and why the world’s central bank may no longer save the day. Make no mistake – we may be on the cusp of truly unprecedented economic carnage. Fear reigns while greed blithely believes. Such is the insidious nature of crisis.
The time for bracing impact is before the levees break. Heed Blackrock’s warning and prepare to batten down the hatches.
American Economy Hooker on Debt Crack – Withdrawal Not Pretty
America is addicted to debt. And the Federal Reserve has been its loyal enabler doling out endless liquidity hits over decades of broadening credit bubbles. But as rates rise and the naive march towards insolvency, warns Spitznagel, "the mother of all crashes lies dead ahead."
Since 1971 and Nixon ending the dollar‘s last tie to gold, total credit has grown over 50x from $3 trillion to nearly $160 trillion today. Unhinged currency creation enabled rampant financialization across government, corporate and household sectors. As inflationary forces built, interest rates were repeatedly hammered lower to mask problems. Until now.
With inflation hitting 40-year highs in 2022, the Fed finally raised interest rates fastest since the 1980s. After anesthetizing markets for so long, the pain is becoming apparent.
Most dangerous – total corporate debt now sits at over $10.5 trillion in America or nearly half the nation‘s annual GDP. That‘s the highest ratio on record.
Half of publicly traded companies aren‘t even profitable as artificially cheap money enabled loss-making zombies to repeatedly refinance. Now the free leverage joyride is ending. And exposure is drastic.
"So many crap companies were basically hooked on debt financed growth steroids for a decade as asset prices were juiced beyond reason," hedge fund legend Carl Icahn recently explained. "Now the leverage party stops but they can‘t pay the tab. Hell of a mess ahead."
As inflation raged out of control in the 1970s and early 80s, then Fed Chairman Paul Volcker notoriously raised interest rates into double digits to harshly re-impose discipline. Corporations and governments addicted to cheap funding were crushed – as outsized bets turned instantly bad.
Today‘s environment risks an even more violent reconciliation with reality according to Blackrock. Years of speculative excess now unwind across an everything bubble put on artificial life support for too long.
Brace yourself.
Puppet Master Fed – Crisis Instigator and "Savior"
America‘s central bank finds itself in an unenviable quandary – largely of its own making.
In trying to cushion recurrent 2008-level economic traumas, the Fed adopted extreme policies like quantitative easing bond-buying and zero interest rates never attempted in its history. The aim was perpetuating growth while providing markets a protective put against downside risks.
In the process, moral hazard grew rampant as financial players gladly embraced amplified risk-taking. Corporate debt levels now sit at perilous all-time highs alongside duration, leverage and loosening credit standards.
Insatiable demand for higher yielding opaque structured products even pushed collateralized loan obligations past $1.5 trillion with covenant protections evaporating. Private equity joined the dice-rolling party with cheap access to frothy acquisition funding.
Rather than allowing markets to fully correct then heal, the Fed overstayed its crisis monetary policies stoking the dangerous everything bubble. And investors trusting central bank infallibility kept bidding assets higher despite increasingly unstable fundamentals over the 2010s.
The band played on sailing towards the proverbial iceberg. Then inflation unexpectedly hit multi-decade highs in 2022.
With its dual mandate for stable prices and employment suddenly at risk, the Fed finally pivoted to aggressive tightening. After years of hyper-accommodation, the effects were immediate and harsh exposing latent fragilities.
Over 20% of Russell 2000 companies now sit at extreme risk of bankruptcy amidst spiking borrowing costs and slowing growth. Trillions in debt suddenly seem unfinanceable as yields soar.
Red lights warning of recession now flash across housing, manufacturing and freight sectors. GDP turned negative in early 2022 while corporate earnings are rolling over at record pace.
America‘s economy seems perched on a precipice. Can the Fed engineer the elusive soft landing? Or will their past interventions ensure crisis? The latter apparently worries Blackrock.
Zombies Amongst Us
While easy money seduced markets since 2008, cracks in the facade were apparent before 2022‘s hikes even began.
A Bank of International Settlements study estimated over 17% of US public companies are now likely "zombie firms." These walking dead have earnings insufficient to cover interest costs, surviving only by repeatedly refinancing.
Ever more creative financial engineering kept the organisms moving yet years of negative cash flow hollowed viability. Now as rates spike alongside looming recession, bankruptcy calmly waits.
McKinsey research suggests $1.4 trillion in corporate debt could default in a moderate downturn. In a severe scenario, upwards of $3+ trillion enters danger territory. And with the economy clearly slowing, no rescue seems imminent.
America‘s investment grade corporate bond market has already declined over 15% year-to-date – the worst start since 2008. As fallen angels swell, rating agencies warn of surging distress. Fitch even projects spike rivaling 2020‘s crisis session.
Junk bonds face hurricane force headwinds. Over $3 trillion in Investment grade bonds face downgrades. And with yields still historically low before 2022, vast refinancing now poses lethal challenges.
"The Fed straight up enabled crazy risk-taking without accountability," says hedge fund legend Mike Novogratz. "Cheap money makes normally smart people stupid. Now zombie companies are getting wiped out."
The IMF estimates over 35% of total corporate debt is held by firms with questionable viability. As rates rose 300 basis points in months, the equation rapidly deteriorated. Now we face down tidal waves of maturities alongside Main Street‘s weakening capacity to service debts.
Get your life jackets.
The Writing on the Wall
Legendary investor Carl Icahn sees the brewing storm with clarity. "I‘ve never seen anything as crazy as today‘s markets," he explained recently to Bloomberg. "God knows how this ends but if you‘re exposed when she blows, it‘s lights out."
Icahn has moved to aggressively hedge his funds against what he calls inescapable reckoning. With corporations overloaded by cheap money binging, he believes they now resemble Wile E Coyote who quickly plunged once glancing down.
For Larry Fink‘s Blackrock, the analysis seems similar. With Institional Investor calling him "The Most Powerful Man in Finance," his actions warrant attention. And they lately scream warnings.
Beyond reallocating away from anticipated US struggles, Fink directly called out dangers in his highly watched 2022 letter to shareholders:
"We are experiencing a paradigm shift in global markets…a fundamentally different context we have not seen for decades. As the cycle turns, the euphoria in risk assets borne of easy monetary policy has come to an end."
Given Blackrock‘s integral role feeding bubble era speculation, the mea culpa seems telling. Today they advise investors prepare for stormy seas as a decade of magical thinking cracks against the walls of reality.
Major financial institutions now openly write of recession hitting within year‘s end. Job cuts simmer across banking, crypto and tech. Housing sales collapse as 30-year mortgages pass 7%. Danger lights flash everywhere including Blackrock‘s dashboard.
Of course crisis prophets always call Armageddon around the corner. Yet with consumer debt now surpassing 2008‘s bubble peak and markets pricing Fed Funds near 5% in 2023, circumstance seems aligned for unprecedented upheaval.
Billionaire investor Sam Zell recently echoed the same tone:
"Very rarely have we gone into a recession with all the excesses that exist today…all of the extra leverage…I don‘t think I‘ve ever seen anything quite this extensive."
Across Wall Street, fear is rising. And Blackrock is first jumping this sinking ship. The platform seems built for cascading contagion without central bank ammo to overwhelm brewing systemic threats.
Winter has arrived and she promises to bite with vengeance. The Titanic meanders on arrogantly assured in its own structural integrity. But finanical icebergs now populate these waters multiplying by the week.
Such is the eerie calm always preceding storms destined to violently reshape landscapes and humble hubris. This time unfortunately no one rings with life jackets as emergency doors fly open.
Final Lifeboats Leaving?
The recent Bank of America Global Fund Manager Survey highlighted a remarkable tidal change in institutional positioning – cash levels just hit highest since 9/11 while global growth optimism sits at lowest ever.
A window seems open for rational investors to evacuate quietly before panic reaches fever pitch. Blackrock‘s actions insinuate warnings to follow their lead.
While impossible pinpointing crisis catalysts or peak danger ahead, historic precedent offers similar guideposts:
In 2000 amidst dotcom excess, cash holdings topped out around 5% shortly before markets crashed nearly 50% over ensuing years. By 2007 with investors euphoric before 2008‘s deleveraging crisis, cash had collapsed towards 3.5% record lows.
In 2022 after the most prolifically money losing era in modern market history, cash peaked again above 6% in May before Federal Reserve tightening even began full swing. Investment conviction simultaneously sits at lowest levels this century.
Such data joins threatening fundamentals in shouting get out agora. Or prepare to ride out epoch defining financial BMW.
MFM Index chart demonstrating weakening sentiment
Blackrock seems to be whispering that very advice between the lines. The world‘s largest asset manager doesn‘t make major allocation decisions like abandoning America lightly.
Yet losses only register when taken. So most investors cling desperately to hope‘s last fumes delaying proactive risk reduction. Avoid their coming pain by taking signals from those first crossing this Rubicon.
Tick tock before the clock strikes doom.