A corporate debt bubble, a wealthy Trump sycophant playing the market, a gilded lie sold to Blue Collar America
|Dec 13 2018||Public post|
I was very annoyed to see Anthony Scaramucci in the news recently. Not because I don’t like him or think he’s up to no good, but because I simply don’t understand why the national media continues to find value in his political insights. Vice News featured him on their HBO show a few weeks back; the following day Buzzfeed had him on their Facebook interview program; last week The Daily Beast quoted him on John Kelly’s impending departure.
From what I can tell, the only reason Scaramucci makes these appearances is because he has a good press person, national outlets are sometimes lazy and always in need of content, and because people find him interesting (I don’t). But it’s all a front. What the Anthony Scaramuccis of the world say on camera and in the press is far from what they spend the majority of their time doing. And what Anthony Scaramucci has spent a lot of time doing recently is betting on a forthcoming recession—and he’s not the only one.
“Almost half of corporate CFOs, 49 percent, say the U.S. economy's decade-long growth streak is set to collide with worsening debt woes, with the country facing a recession by the end of next year,” Newsweek reported Tuesday, noting that the other half of American CFOs predicted a recession will occur by the end of Trump’s first term.
“Billionaires and millionaires in the U.S. are arranging loans to have funds readily available so they won’t have to sell off investments in the event of an economic downturn,” Bloomberg reported last month.
For his part, Scaramucci has been preparing for the coming recession (and I very much do believe one is coming sooner than 2020) by having his hedge fund, Skybridge Capital, get ready to make some bets in the corporate bond market. That’s what he does to make his living. What he says on camera is what he does for his ego. In those appearances, Scaramucci says that everything is fine, the economy is booming, and Trump is a great president who’s making it all happen. I assume he makes this case in his new book, Trump, the Blue Collar President, but I dare not read it as I have only limited space in my brain for the ever-expanding vapidity of this administration and the politics it has wrought.
There is the Scaramucci who reaches out to Joe Six Pack via his book and there is the Scaramucci who puts on an expensive suit and goes to work in New York each day. When it comes to the latter, tell me how blue collar this sounds:
“Our largest short position right now is in high yield, and it’s not because we think we’re going to make money this year or next year,” he said. “It’s to protect against the eventual recession or [a] surprise recession.”
That’s Troy Gayeski, Scaramucci’s point man at Skybridge, talking about how the hedge fund is directly planning for a recession while Scaramucci promotes a book about how Trump’s economic policies are helping out the average working man.
You wouldn’t know any of this from the Buzzfeed or Vice News interviews, or any of Scaramucci’s recent TV appearances, where interviewers seem blinded by his smile and charisma and never seem to remember that he runs a hedge fund that makes bets with billions of dollars of other (extremely rich) peoples’ money, and that what he does there is probably more newsworthy than whatever political insights he may possess.
I talked to Morris Pearl of Patriotic Millionaires about all this. Pearl, who I forgot to ask but I’m sure has enough money to buy my house a hundred thousand times over, once led BlackRock, one of the biggest investment firms on the planet. He says his group of like-minded millionaires wants a more progressive tax code that would tax people like him at a higher rate than the current structure allows. He says the Scaramuccis of the world—like Pearl himself—will be just fine if and when a recession hits. It’s everyone else, all of the rest of us who aren’t playing the market like an experienced gambler, who’ll end up getting hurt by an economic downturn.
“Scaramucci is looking very seriously that the economy will slow down, that corporate profits will go down,” Pearl told me. “I would certainly say that he is saying one thing to one audience and another thing to a different audience.”
Specifically, Scaramucci is looking to “short” high-yield corporate bonds, which are basically risky loans that large companies take out, promising to pay back investors at a high rate of return once they turn those loans into cash from whatever product or endeavor they create from the borrowed money. (By “shorting” them, Scaramucci is betting that the bonds are worth as much now as they’ll ever be, because he believes a recession is imminent.)
For years now, the Federal Reserve has made these bonds available at very low interest rates. Recently, though, there has been talk of raising those rates in order to wean people off this flow of easy money and fully recover from the 2008 recession, Pearl told me. The Fed chairman was expected to announce a rate hike two weeks back only to balk after a pseudo-threatening tweet from Trump. Now, Fed watchers are expecting at least a small interest rate hike later this month.
The rates were so low for so long because readily available loans are seen as a way to revive a sagging economy, Pearl said. “But you can’t go any lower than zero,” which isn’t far from where the rates have been.
This has led to what some are predicting to be the next big bubble—corporate debt—to burst, and one that could make an economic downturn worse than it has to be. If and when that happens, credit will dry up not just for large corporations but average Americans.
“That bubble bursting would be very bad for people who want to get mortgages, auto loans, student loans, any kind of loans, really,” Pearl said. “When corporations borrow money, indirectly it’s people borrowing money.”
Plus, once that credit dries up and companies aren’t able to hire new workers and expand operations on that borrowed money, there goes the job gains we’ve seen over the past two years. Forget about raising wages, too.
William Cohan, a former investment banker and regular op-ed contributor at The Times, has been sounding the alarm on corporate debt bubble for some time now. In late November, he wrote about the tremendous amount of high-risk corporate debt—the same that Scaramucci is looking to offload in anticipation that its worth is about to plummet—among major American companies.
The number is inconceivable to me, but apparently these risky BBB-rated corporate bonds—which aren’t even as risky as CCC-rate bonds—have tripled in quantity since 2008 to $2.5 trillion, part of the $9 trillion in debt American companies have altogether.
“It’s been quite a party,” Cohan wrote in late November. “Now comes the hangover,”.
But it won’t just be those at the party battling the hangover. All of us who didn’t get invited will pay the price, too.
"Corporate indebtedness is now quite high and I think it's a danger that if there's something else that causes a downturn, that high levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies in the non-financial corporate sector," Janet Yellen, former Fed chairman under Obama, said Monday.
You see that part about the “non-financial corporate sector”? That means companies that actually create goods and services, not just those who play in the markets.
Scaramucci owns one of those companies. SkyBridge Capital doesn’t actually create anything. And Scaramucci isn’t the type of person who actually works for his money—his money works for him, Pearl notes. Pearl includes himself in the same category of fortunate Americans whose bank accounts grow not because of the hours they’re putting in at the factory but because of the skill with which they navigate the markets. But Pearl is telling non-wealthy Americans to be wary of the economic policies pushed by Trump, his super-rich cabinet and congressional Republicans. Scaramucci meanwhile is telling the average American that those people—chief among them the “blue collar president”—have their backs.
“There’s two ways to make money. Some people work and get paid for their work. Other people make money off their investments,” Pearl said. “And it’s very clear that the Trump administration wants to favor the latter and not the former.”