Tags: carl icahn | financial disaster | economic crisis | cnbc

Icahn Warns of Another 2007 Investor Panic

By    |   Thursday, 16 July 2015 09:33 AM

CNBC’s Scott Wapner moderated a scene at the CNBC Institutional Investor Delivering Alpha Conference where Carl Icahn, chairman of Icahn Enterprises, warned of a looming panic similar to the episode of 2007.

Icahn criticized asset management firms such as BlackRock for selling exchange-traded funds that give an illusion of liquidity for “extremely illiquid, and extremely overpriced” securities such as high yield bonds, Bloomberg News reported.

Icahn warned that such instruments are “extremely dangerous.” BlackRock Chief Executive Officer Laurence Fink disputed the allegation.

“This thing is going to go over this cliff and you know what’s going to destroy it? They’re going to hit a black rock,” Icahn said at the conference Wednesday in New York.

“What’s going to happen is, as interest rates go up, there are a lot of people out there that own these trillions of dollars that don’t even understand that they own this high-yield stuff,” Icahn said.

Icahn predicted that when Yellen raises rates, there will be a run, “and there is nobody to buy that stuff.”

Fink responded that this is not a problem, because he thinks there’s no leverage and, “I disagree 100% with that characterization. Higher rates, which I don’t think we’re going to be that much higher, are actually going to move more money into the bond market, not less.”

He cited insurance companies and pension plans as moving into fixed-income vehicles as their clients age, taking action to lock in the higher rates.

Fink insisted, “I’ll take that bet any time.”

Icahn warned of likely defaults in high-yield oil debt and that investors are risking 40% losses. To the question of who will end up buying these, this writer expects it will once again be the Fed.

Meanwhile, Philippe Legrain, former economic advisor to the President of the European Commission, offers a view of the Greek deal that is overtly cynical and therefore likely instructive as he characterized the circumstance as “life support, in order to save German politicians.”

Legrain charged that the Germans propose to run the country and to do so “not in the Greeks’ interest, but in their own interest.”

He predicted that “the Grexit movement is going to strengthen” as Greece suffers at the hands of its creditors. An interviewer quoted the German press as saying Germany comes out looking “ugly, hard hearted, and stingy,” and she asked whether the deal would be “a game changer for politics in Germany.”

Legrain responded that “fear and anger against Germany” will take hold all across Europe.

Next, Cole Smead, of Smead Capital, warns of the potential for panic to strike “passive investors” because they forget that index funds represent “a basket of companies” from which the passive investors are trying to distance themselves, even as they take exposure to the funds.

The interviewer touts ETFs as representing value and efficiency compared to traditional funds, but Smead says what investors are getting from Charles Schwab is “just enough rope to hang yourself.”

Asked how investors can bet on the Fed raising interest rates, Smead responded that Janet Yellen has said “the longer the Fed waits, the steeper the rise will be.”

He asked, “If rates are going to 5.5%, why be cute about it?” Smead observed that a rise would have a differential impact on affected companies, and he recommended banks as a vehicle for taking advantage of higher margins.

This writer has warned that by being cute the Fed is risking a market tantrum.

Guy Miller, of Zurich Insurance, cited several countries that thought their economies were in shape to raise rates but had to take them back. He summarized the circumstance as “a lack of global end demand, and the problem is that the only people who are there to provide that stimulus are the central banks, again,” which he called “unfortunate.”

Miller recalled that a “taper tantrum” of only 1.5% caused the housing market “to completely seize up,” and he concluded, “There are surprises still out there, so why wouldn’t you just err on the cautious side” and wait for wages to pick up?

This writer would add that at the Yellen hearing, Rep. Carolyn Maloney (D-NY), who represents Wall Street, once again urged caution in raising rates.

(Bloomberg News contributed to this report.)

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CNBC's Scott Wapner moderated a scene at Institutional Investor's Seeking Alpha conference where Carl Icahn, chairman of Icahn Enterprises, warned of a looming panic similar to the episode of 2007.
carl icahn, financial disaster, economic crisis, cnbc
Thursday, 16 July 2015 09:33 AM
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