Why High Yielding Bonds will Cause the Next Market Meltdown

Have you heard of Carl Icahn?

You should have.

The Wall Street veteran made his multibillion dollar fortune buying controlling stakes in companies and then selling off their assets to settle the debt he used to purchase them.

As a broker on Wall Road since 1961, he knows an undervalued company when he views it. He also understands putting on a costume financial details to make a company look better than it is.

Corporate raider may be the nickname for Icahn.

The point Im attempting to make is, Icahn has been around. Hes seen it all before.

And lately the price of high yielding bonds is troubling him.

So much so, that he just released the 15 minute video known as danger ahead. In it he explains which falling commodity prices are just part of the problem.

Thats not new information to most market watchers. But Icahn reckons the real danger is based on these high yielding bonds. Or junk bonds, as he loves to call them.

High yield really stands for junk bonds. People are purchasing these not really understanding what they’re buying. If you look at the numbers, they are amazingly risky. You will find US$2.2 trillion ($3.15 billion) in junk bonds, upward a trillion dollars in five years.

On the other side of this theres information site Barrons.com. They think Icahns video is nothing more than scaremongering.

Despite fear-mongering through?Carl Icahn, the junk-bond market is starting to look appealing.?

Icahn even showed the cartoon in the video of Federal Reserve Chair Janet Yellen as well as BlackRock CEO Larry Fink pushing the bus full of retail investors to the edge of a high cliff.

His concerns, however, look over-stated. While there are troubled areas in the junk market, mainly in energy and mining-company bonds, most industries are in decent shape

The average energy issue yields more than 10% now, and alloys and mining, nearly 15%.

The post then explains that these so called junk bonds Icahn is talking about are coming back around 8% per annum.

Theres a reason why Icahn is drawing attention to higher yielding bonds. He reckons they’ll catch out retail investors in the next market crash.

The problem in Icahns opinion is that mum & dad investors look to higher yielding exchange traded funds (ETFs) investing in junk bonds. While the come back is high, the risk of default is much higher.

He says that traders have a false sense of security about these products. Too many regular investors reckon theyre a safe investment, and easy to sell in a market downturn.

The reality is very different. Because Icahn told Business Insider:

It’s like a movie theatre and somebody yells fire. There is only one little exit door. The exit door is fine when things are Okay but when they yell fireplace, they can’t get through the exit doorand there’s nobody to purchase those junk bonds.

A death by a thousand cuts

Dont for a 2nd think Icahns video is scaremongering.

There is definitely an imbalance in the economy, and junk bonds will be the next reason for a market meltdown.

Most market viewers in Australia are busy commenting on the falling mineral and metal prices. Yet theyve overlooked the long term effects of a slipping oil price for Aussies.

However, if Jim Rickards, the strategist behind Strategic Intelligence, is right, energy prices particularly oil are set to cripple the worldwide markets.

As I explained to subscribers last week, Jims had energy junk bonds on his radar since The month of january this year.

The way he views it, theres trillions of bucks in energy related debt that cant be paid.

The result is the $14 trillion pile of company debt that cannot possibly be repaid or rolled over below current economic conditions. Not all of this debt will default, but a lot of it will. Most of the power related debt was released in the expectation that essential oil would remain in the $80 to $130 dollar per barrel range.

Energy-sector debt has been called into question because of the collapse of oil prices. And rising markets debt has been called into question because of a global growth slowdown, global deflation, and also the strong dollar.

Jim reckons we are taking a look at a much larger debt problem than subprime. He reckons if default rates are only 10% something he or she considers a conservative estimate it would be six times bigger than the subprime losses in 07.

The magnitude of this crash will like the subprime one leave the actual regulators completely unprepared.

The great news for investors is that this disaster will not happen overnight. It will require a year or two to experience out. The panic associated with September 1998 started last year, in Thailand in June 1997. The panic of Sept 2008 also started last year, in August 2007.

This new junk debt fiasco going in the summer of 2014 but will not really reach its peak until 2016 or later.

As Jim points out, market crashes dont happen immediately. If anything, the looming meltdown will be a death by a 1000 cuts.

Regards,

Shae Russell,

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

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