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I’ve never been one to mince words when I see dangerous bubbles inflating. And I’ve never been afraid to really ramp up the volume of my warnings when I feel the top of a speculative bubble is getting close.
Take housing.
I started warning about the overheating market in 2004. Then a year later, I shouted from the rooftops that we were topping out — publishing the headline “Final Stage of the Real Estate Bubble” with Martin in the June 2005 Safe Money Report. The crash that followed over the next four years was the worst the American housing market has ever seen.
Then real estate investment trusts (REITs) entered their own version of la-la-land during the mid-to-late-2000s. The stocks were trading at ridiculous levels as hot money chased the sector ever higher. So I first warned here in Money and Markets in September 2006 that we were seeing a commercial real estate “binge,” with “the fundamentals going soft … valuations at pie-in-the-sky levels … and a veritable feeding frenzy going on in the sector.”
Then in May 2007, I said enough was enough. I listed five major reasons why the REIT bubble was going to burst. I recommended dumping REIT stocks across the board, or even consider going “short” through vehicles like inverse ETFs. Over the next 22 months, the benchmark iShares Dow Jones U.S. Real Estate Index Fund (IYR) plunged 76 percent!
Now we are about to roll into 2013. And the out-of-control activity I’m seeing in the market for high-risk, junk bonds is as bad — and by some measures, WORSE — than we saw in both of those instances. So it’s time to call a spade a spade. This is a dangerous, new bubble, and I recommend you get out of the way. Now!
Tsunami of cash flowing into junky bonds
Smells of yet another bubble!
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| The buying frenzy we’re seeing in the junk bond market is fueling the next bubble. |
Back in the mid-2000s, we saw a speculative bacchanalia in high-risk debt. Collateralized Debt Obligations (CDOs). Collateralized Loan Obligations (CLOs). So-called PIK bonds. High-yield (junk) bonds. Investors were chasing anything and everything, even as they also loaded up on Miami condominiums and Las Vegas townhomes.
To zero in on just the junk bond part of that bubble, though, companies were able to sell an average of $144 billion in high-yield debt per year. The reason? Investor demand for anything that yielded more than Treasuries was practically insatiable, courtesy of too-low interest rates from the Federal Reserve.
But what’s going on now makes that ten-kegger frat-house blowout look like a preschool tea party!
In the first 11 months of this year, companies sold a whopping $324 billion in junk bonds, according to Dealogic. That means with one month to go in 2012, the speculative junk bond bubble is more than DOUBLE the size of anything we saw right before the 2007-2008 crash!
Separate figures from Thomson Reuters show junk bond issuance is up a whopping 36 percent year-over-year through October. More junk bonds were sold in September of this year ($43.3 billion) than in ALL of 2008!
Michael Gitlin, a fixed income official at T. Rowe Price warned in an AP story a few days ago that “It’s getting harder and harder to find places to invest,” and that “when you start seeing things like you saw in ’06 and ’07, you should be concerned.”
Meanwhile, Sheila Bair, the former head of the FDIC, is also warning about a massive bubble in risky bonds. In a column in Fortune earlier this year, she wrote “As we saw in the years leading up to the subprime crisis, yield-hungry investors are taking on more and more risk. Pension managers are investing in hedge funds, and gullible investors are buying up junk bonds.”
I couldn’t agree more!
Complacency running at levels not seen since just before the credit bubble popped! Wall Street unprepared for what’s to come! Here’s what I recommend you do …
If people were actively fleeing lousy debt securities, or buying protection against a collapse brought about by a bond meltdown, then that’d be one thing. It would show that investors were prepared for, and protected against, the bursting of another bubble.
But they’re not!
The VIX index is hovering around its lowest level since 2007, signaling the kind of complacency we haven’t seen in the stock market since just before the credit bubble burst.
And the MOVE Index, which measures bond market complacency, just sank to its lowest level since it was conceived in 1988! The only other time we even came close? 2007, right before the credit bubble burst.
Can you see why I’m so concerned?
We have massive inflows of cash into a high-risk asset class, more than double what we saw in the mid-2000s.
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| Even professionals are setting themselves for a fall. |
We have so-called “professionals” supremely confident in the Fed’s ability to keep those assets artificially propped up with cheap money, exactly the kind of misguided confidence that preceded the worst housing and mortgage collapse ever.
And we have investors largely flying without protection … no parachute in the form of options or other hedges against the popping of this huge bubble.
So here’s my prescription for what to do:
If you own the SPDR Barclays High Yield Bond ETF (JNK), sell it.
If you own the iShares iBoxx $ High Yield Corporate Bond Fund (HYG), sell it.
If you own the PowerShares Fundamental High Yield Corporate Bond ETF (PHB), sell it.
And if you own junk bond mutual funds, or individual junk bonds, that you can’t sell for tax or other reasons, consider hedging with the ProShares Short High Yield (SJB).
Until next time,
Mike
Bonjour,
Où trouver l’index MOVE ?
Merci beaucoup si vous pouvez me renseigner !!
Emmanuel
While many may disagree with you, I do not.
It seems obvious to me that yet another bubble has formed and this one is in the junk bond market. But the bigger question that I would like for you to answer is what you see as the catalyst that pops this bubble, the linchpin that causes the crisis, and your opinion on approximate timing that everything goes down the tubes (months/year/years away?). I realize that predicting the markets is impossible to pin with precision, but exiting a market five years too early (as example, not my actual view) could be a problem. One could argue that this bubble, as has been the case in others, is quite sustainable in the near-term. The US does remain a strong market relative to the globe and as problems unfold around the globe it seems to me that funds will continue to flow into the US, allowing cost of capital to remain cheap and the bursting of the bubble to be exceedingly difficult to predict. That takes me back to my question of what you see as being the catalyst… Randomly, high yield investors wake up one day and say, “Enough!”? Another credit crisis that dries up funding to these weak companies along with many others? Underlying economic difficulties? Something else?
Keep up the great work! Your insights are invaluable.