“It’s contained until it isn’t.”
On Thursday, a junk-bond fund imploded, the first since the Financial Crisis.
For over a year, we’ve reported on junk bonds, many of which have now crashed. We’ve warned about bond funds, like the one that imploded. They’re structurally unsound. They’re liquid for investors who can sell them with the click of a mouse. But the underlying bonds are illiquid and often cannot be sold at all, except to hedge funds that are betting against the bond fund.
On Friday, I appeared on the radio show, Stocks & Jocks hosted by financial industry guru Tom “The Chief” Haugh, with Kathy Dervin and futures broker Kevin O’Neill. We discuss the implosion of the bond fund, the broader junk-bond fiasco, how it impacts stocks, and how, like the housing crisis, it’s always contained – until suddenly it isn’t.
Below are my 20 minutes with Stocks & Jocks. The whole two-hour show is here.
And here’s my article: Read… It Starts: Junk-Bond Fund Implodes, Investors Stuck
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The first modern Corp. was the the Bank of New York. Founded by Isaac Roosevelt & Alexander Hamilton in 1784. It was the first traded stock on the NYSE in 1792.
The junk bond market is a house of cards!
Re: the guy’s question to Wolf about ‘why now, why are dominoes falling now”
We are so used to the idea of weakness in commodities we may not notice how the downturn suddenly accelerated in the past few weeks.
A week is getting to be a long time these days.
This last week Anglo-American announces it is exiting most of its activities and laying off 85,000 workers.
Oil blows right past a so- called floor of $40 (Brent)
Brazil down graded to one notch above junk.
I believe all this has happened in the last week.
One thing to note: as iron ore and oil apparently wish to converge at 30, each dollar drop is a bigger percentage drop.
I first noticed this psychological blind spot in myself when I was looking at a junior Alberta oil I’ve been following. It had dropped a buck and a half or something but I was surprised to see that this was a double digit loss, because over the months it had dropped 40%.
I think the analogy here is the old saw about throwing a frog into boiling water. He is supposed to jump out. But if you put him in a pot of cold water and begin heating it, he never jumps out and dies. His error is getting used to his surroundings. (Please don’t do either)
Here is another way of overcoming this blind spot. Bring up, or physically obtain business magazines from a year and a half ago.
Then try and imagine today’s headlines in those papers.
It will be like putting stories about the latest smart phone in a 2002 tech mag. Disaster stories that we shrug off will stick out like a giraffe in a herd of cows.
Just 18 months ago oil was a hundred a barrel. There was almost no mention of the R word.
But then, having seen the trend from then to now, I guess we have to extrapolate.
And that is ugly.
Ah the high yield AKA JUNK bond…
It started with hedge funds liquidating the high yield bond funds knowing tsunami of redemptions are forthcoming (not to mention margin calls since many funds were leveraged to hilt using cheap money) so better get out of dodge while they can thru the soon to be very crowded single exit door.
Next up are margin calls to the investors small and big alike who foolishly over-leveraged/margin to hilt coaxed in by higher interest rate in ZIPR environment not having read/understood the prospectus about losing their shirts. Leverage is awesome when the market goes up and real bxtch when it tanks…
BTW – 3rd Ave fiasco sounds like there are more skeletons in the closet are about to be exposed to ah the Bear S and Lehman moments of evaporating liquidity…
It was a great coup for us to get Wolf on the show, and the people who read & comment on his articles are the best!
Thanks for the in-depth answers to our questions on last Friday’s show.
-Kathy Dervin, Stocks & Jocks
Who’s gonna buy these literally junk bonds? This is going to be a bloodbath
There will be buyers for sure but the $10k questions is when like $0.20 to a dollar maybe. I’m sure there are savvy investors with cash chest but not quite ready to plow in as there will be dead cat bounces along the way and not quite blood all over the lah lah junk bond street, yet.
20¢ on the $1.00?
Really?
Perhaps those willing to buy at that discount fail to grasp that these bonds are junk for a reason.
Should the bond market collapse, it is a safe bet that those corporations already rated that low will go into forced liquidation. In many , if not most, cases the debt will substantially exceed the salable valuation of the corporation’s paper assets leaving bondholders with poor quality toilet paper.
The actual asset liquidation value is not known until the money changes hands. A paper valuation is only worth the cost of used paper when the greater fools withdraw from the market.
Never forget these maxims:
1. Everything is connected to everything.
A junk bond collapse will have substantial knock-on effects on all other bonds and other marketable assets as those holding junk dump all the highest valued assets to cover their losses.
2. Everything has to go somewhere.
If a junk bond can’t get the market to drive its value higher, then it is inevitable it will fall lower. Pricing is not static, but rather dynamic as buyer and seller perceptions change due to #1 above.
3. There ain’t no such thing as a free lunch.
Profits are only gained by selling to a greater fool.
Unfortunately if the profit potential is low to nil, it isn’t possible to even break even once commissions are considered. It is easy to realize that nominal profits can in actuality be substantial losses once monetary expansion (inflation) and taxation are considered.
Is it possible that some will remain behind to sweep up the junk at 5¢, 10¢ or 20¢ on the $1.00 while everyone else runs for the door? Of course. There are lots of folks eager to throw good money after bad. Never underestimate the emotive drive of those eager to feed their greed.
So one more time, all too often a fire sale is actually the market burning down around the participants leaving them with only paper claims on non-existent assets after the forced liquidation.
Junk bonds are junk for a reason. Stampedes at the exit always produce substantial losses. But feel free to stick around the fire and roast the stale marshmallows left behind.