The surge in AUM has indeed been staggering - graph source Bloomberg - ETF Market Capitalisation:
After more than tripling their assets in 2013, the loan funds are now growing four times as fast as the rest of the $262 billion market for fixed-income ETFs, according to data compiled by Bloomberg. The biggest leveraged-loan ETF, Invesco Ltd.’s $7.4 billion PowerShares Senior Loan Portfolio, has already amassed almost a billion dollars in new money this year.
The popularity of speculative-grade loans, which have rates that rise with benchmarks, has soared with debt investors seeking shelter from higher borrowing costs as the Federal Reserve moves up its rate-increase projections. While the demand has been a boon for ETFs that invest in loans to the neediest companies, it’s also prompted regulators to warn that excesses which contributed to the credit crisis may be creeping back." - source Bloomberg
As Warren Buffet quote goes, risk does indeed comes from not knowing what you are doing given that single-B rated loans now make up the largest portion of the junk-loan market compared with 2007, when double-B rated loans were the most popular. As a reminder, during the credit crisis, loans were the worst performers among the major credit asset classes, losing 23 percent in the last quarter of 2008.
Loan ETFs are yet to be tested, by our "liquidity" fat-tail concerns but they are sure becoming "Too Big To Fall", and if indeed selling pressure does materialise, they will probably sell-off fare more than the index because they might not be in position to redeem the assets at the pace of the money being pulled out. Caveat investor...
In a world of increasing "positive correlations" where convertibles ETFs as well are getting even more sensitive to "equities", last year's sell-off in the credit ETF space for High Yield (ETF HYG) and Investment Grade (ETF LQD) illustrate, we think the "redemption" risk - graph source Bloomberg:
Prime London real estate is up 2X since 2006, 3X since 2000 and 4X since 1998.
And yet UK rates are the lowest they have been in 300 years. In our view, London property is a classic outcome of the Max Liquidity-Min Growth backdrop of the past seven years. We believe the risk of "speculative fervor" remains high. The UK could prove a useful early warning system.
Prime London real estate has doubled since 2006, tripled since the 2000 and quadrupled since the last great Asia/EM crisis of 1998 (Chart 3).
As per our conversation "Cantillon Effects", we too, have an our own useful warning system, being the art market in general and Sotheby's stock price versus world PMIs since 2007 - graph source Bloomberg:
As a reminder, why did we choose art as a reference market in describing "Cantillon Effects" and asset bubbles you might rightly ask?
Yet another example of "illiquid asset" such as London real estate to monitor closely in the near future and another illustration of our 2007 feelings we think.
On a final note and relating to our deflationary monitoring stance, we have been tracking with interest the shipping space as you know and looking at the recent Asia to Europe container shipping rates, it continues to fall and has indeed fallen to a 21 week low:
What is of course of interest is the additional rate increases to counter the deflationary forces at play still wreaking havoc on the shipping industry as a whole. As a reminder, Containership lines have announced 13 rate increases, totaling $5,450, on Asia-U.S. routes since the beginning of 2012.
So what is the new trick to offset deflationary forces, you might rightly ask? It is called "Container Liner Alliance" by the U.S. Federal Maritime Commission (FMC) when it should be called "Oligopoly" or more simply a cartel:
"The U.S. Federal Maritime Commission (FMC) approved the alliance of the three largest containerliners Maersk, Mediterranean Shipping and CMA CGM, dubbed P3, on March 20 to set sail in 2Q.
The alliance of 252 vessels (2.6 million 20-foot equivalent units) represents 42% of Asia to Europe, 24% of Trans-Pacific and 40% to 42% of Trans-Atlantic capacity, according to the FMC. P3 may help reduce costs and manage excess capacity, stabilizing rates." - source Bloomberg.
So in the competition of survival of the fittest, the set-up of a de facto "cartel" in the shipping space with the benediction of US authorities has no doubt "boosted" the probability of survival of the big three. This latest "intervention" does indeed validate our January 2014 musing "Shipping and Deflation - Only the strong survive":
"In a Bear Case scenario, only the strong survive such as Maersk. The world's largest container shipping line with 15% of the world's market share, did report an 11% increase back in November in third-quarter profit after cutting costs by 13% in the quarter helped as well by its new line of triple-E ships being introduced which has been countering the deflationary trend in freight rates." - source Macronomics, 9th of January 2014
Looks like the containers industry is like the banking industry after all, it's "Too Big To Fail".
"If my survival caused another to perish, then death would be sweeter and more beloved." - Khalil Gibran, Lebanese poet