Old school private equity guy-turned-hedge fund manager, Michael Tennenbaum, was on Bloomberg TV, discussing his perspectives for the distressed debt market (yes, such a thing did once exist, before HY bonds of 20x levered companies starting trading at par+). And all those who believe that courtesy of the Fed’s intervention in every market there will never be another bankruptcy, let alone a bond yielding more than 10% take heart: according to Tennenbaum a full $50 billion in distressed debt may go Chapter in the next two years, although this is probably more good news for all the mini restructuring boutiques who overhired last year only to see the administration make bankruptcy illegal. The math: Over the next five years $1.2 trillion in non investment grade debt comes due, of which $200 billion are due in the next two years, and of that a quarter or $50 billion are issued by companies rated rated B or lower. The experience that we and others have had is that this leads to default. Of course, Tennenbaum is a traditional debt-for-equity investor is more than incentivized to see this occur: he is currently sitting there doing nothing, as not only does nobody need DIPs or other rescue financings (why, when you can issue new B3/B- debt at 8%), but no company is willing to part with equity when every pitchbook it sees tells it can progressively refi current debt into paper that may eventually pay a 0.001% coupon. On the other hand, this, as well as every other contrarian outlook is predicated on the assumption that the Fed will be able to control the demolition of the US economy, which it won’t. Which is why we are confident that not only will Mike be correct (eventually), but the full amount of HY paper that will default will boggle the mind when the dominoes really collapse. Until then, study learn (and earn) the Bernanke Moral Hazard Put: learn it and love it.

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So lets do the math gedunken.

$11 Trillion Mortgages, $11 Trillion Treasuries, $15 Trillion GDP, $50 Trillion Equities, $615 Trillion derivatives, most of them interest rate sensitive.

And now the Federal Reserve Banks hold $800 Billion Treasuries, soon to be the largest single holder in the world.

Is it more likely we have debt default inflation in Spades or hyperinflation as Bernanke, Geithner and company are defenestrated, peeled, piked or sent to non-extraditable Paraguay with the Bushes and Rev Moon?

www.cco.net/

trufax/general/bush_family_paraguay_hideaway_up.html

PS Could this account for no small part of the decline in banks the last fortnight?

All aboard.

The train is leaving the station, and it has no bank stocks, bonds, gold or equity longs.