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‘Too Much Debt, Too Little Cash’: Commodity/Junk Bond Market Starts Crashing

Dec. 9, 2015 (EIRNS)—With that phrase, Bloomberg News reported this morning that the century-old British colonial mining company, Anglo-American, is in trouble; and that "Anglo-American is a shadow hanging over Glencore." Anglo-American is now the fifth-largest mining/commodities trading company in the world; Glencore is the largest.

Anglo-American announced that it will shrink by two-thirds — eliminating that portion of its workforce with 85,000 terminations, and selling two-thirds of its assets—that is, if it can. Bloomberg quotes bankers saying this may not be enough to save the company, whose stock has lost three-quarters of its value in recent months. As for Glencore, going into its annual meeting tomorrow its risk of default is now well over 50%, according to the indications of its credit default swaps.

On Dec. 7 the Wall Street Journal, in a front-page article, "Junk Bonds Flash an Economic Warning," had said that "The declines [Moody’s and S&P’s recent warnings of a wave of junk-bond defaults] are worrying Wall Street because junk-market declines have a record for foreshadowing economic downturns."

"Seeking Alpha" on Dec. 9 published Michael Snyder (of the "Economic Collapse Blog") on "Guess What Happened The Last Time Junk Bonds Started Crashing Like This?" Writes Snyder,

"The extreme carnage that we are witnessing in the junk bond market right now is one of the clearest signals yet that a major U.S. stock market crash is imminent.... They aren’t really ‘junk.’ They simply have a higher risk and thus a higher return than other bonds of the same type.... If stocks are going to crash, you would expect to see a junk bond crash first. This happened in 2008, and it is happening again right now."

The St. Louis Federal Reserve Bank reports now that interest rates on the lowest-rated junk bonds have reached 17%, the 2009 post-crash record high. This represents about $200 billion in mainly commodity-related debt, which thus can’t be refinanced, and is the "default wave" being warned of.

The Wall Street Journal on Dec. 9 followed up with an article titled "Defaults Jump in Emerging Markets." But the chart accompanying the article shows otherwise. While emerging-market economies’ defaults have risen in 2015, continuing a rise in 2014, what has "jumped" is defaults in the United States (from 35 companies in 2014 to 60 by Nov. 4, 2015); and in Europe.

It is in this setting that Fed chair Janet Yellen swears her FOMC will raise the interest rate next week, while Europe’s ECB has lowered it in desperation to -0.3% and the Bank of Canada has just given out a "guidance" to expect -0.5% shortly.