EC CLOs Join The Everything Bubble

Sounds promising, right? And, alas, also familiar.

Perpetual Motion Machine

Once they really get going, asset-backed securities like CDOs and CLOs take on a kind of perpetual-motion-machine vibe in which easy money begets even easier money. To the extremely credulous, such a system looks capable of spinning right along forever. Unfortunately, this perception tends to become widespread just as some crucial cog in the machine is about to break.

Which cog will it be? Candidates abound. Interest rates might rise, stocks might tank, the government might realize its policies are stoking instability and try to “taper.” Some wild geopolitical event might occur. It doesn’t matter which breaks first, as long as one eventually does.

Then the perpetual motion machine shifts into reverse, with rising defaults causing lower CLO bond ratings and thus kickstarting mass sales by panicked institutions. And so on, until whoever had to the courage to short this market cashes out with epic gains.

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