U.S. Junk Debt Collapse Keeps Spreading, 'Blame It on China' Debunked

December 30, 2015

As the blowout of high-yield or "junk" debt related to commodities continues in the U.S. credit markets, at least three and perhaps a half-dozen more hedge fund failures were reported Dec. 29. Seneca Capital Resources, a 20-year-old fund at the center of a well-known annual event called the Sohn Investment Conference, announced closing, as did LionEye Capital Management and Blue Crest Capital Management (both after large losses). Even the huge Fortress Investment Group LLC and BlackRock Inc. are closing down some of their commodity debt-related funds, according to Bloomberg. Hedge fund failures are frequent, but the 694 failures from January-September 2015 were already double the 2014 number in the same period. There has clearly been a large acceleration in the crash since September.

The Market Realist, an oil industry publication, reported Dec. 19: "The Federal Reserve Bank of Dallas has reported that oil companies' bankruptcies have reached the level met during the 2008-09 recession. Nine oil and gas companies with debt more than $2 billion [each] have filed for bankruptcy in [4th quarter 2015].... Many oil and gas companies are on the verge of filing more bankruptcy cases. In 2015, Samson Resources, Sabine Oil & Gas, and Quicksilver Resources were the largest oil production bankruptcy cases, with debts of $4.3 billion, $2.9 billion, and $2.1 billion, respectively. This is a huge loss to creditors."

Market Realist estimates a direct loss of 70,000 jobs (including indirect losses, some 150,000 layoffs) in 2015 in just this part of the oil/gas industry, which does not include oilfield service and transport companies and does not include the big oil majors.

The Dallas Fed also reported, in its December manufacturing survey, the most disastrous industrial contraction in 12 straight months of contraction in Texas. Its December index was at -20.

In another telltale development, Bloomberg Business on Dec. 30 blew up the Obama Administration's demand for 247% tariffs on Chinese steel products. The steel industry's dramatic slump in 2015 has been due to the oil collapse, not China imports, according to ... the U.S. Census Bureau. Census reported that foreign steel coming into the United States has dropped 36% from 2014 levels, with new import taxes on products from six countries. "Yet U.S. mills have idled the most capacity since the financial crisis, operating at just 61% in the week ending Dec. 21." The reason: "Faltering demand for steel pipes and drill bits used in the energy industry. Previously, sales of high-margin products to oil and gas companies had helped shield U.S. mills from sluggish growth in construction and other industries."