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Peak Madness!

Wednesday, July 17, 2019 19:25

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“Peak Madness!”

by Brian Maher

“We have concluded – at certain times – that markets have attained maximum derangement. No greater lunacy was possible, we insisted. Yet in each instance… we were proven incorrect. See, for example, negative interest rates.

Yesterday we staggered before the existence of government bonds trading at negative yields. But today we test the very limits of madness. What is more lunatic than investors purchasing negative-yielding government bonds? And does it indicate the end is near? Answers, frightful answers, anon. Let us first look in on the asylum…

The Dow Jones lost 115 points today. The S&P surrendered 19, and the Nasdaq, 37. Yahoo! Finance, by way of explanation: “The three major indices were weighed down as investors continued to digest uncertainty over U.S.-China trade relations, after President Donald Trump on Tuesday suggested he could still impose tariffs on about $300 billion worth of Chinese goods.”

But to revisit today’s grand question: What is more lunatic than investors purchasing negative-yielding government bonds? The answer — and we do hope you are seated: Investors purchasing negative-yielding junk bonds. It has come to pass, in these our dizzied days.

Bank of America Merrill Lynch informs us 14 firms with junk bonds exceeding $3.38 billion presently trade at negative yields. Reflect for one moment on its implications — if you are capable.

A junk bond is a debt instrument issued by corporations with such battered and creaking financials… their very existence enters into question. Hence… junk. And their investors may ultimately go scratching. These corporations must therefore offer vastly swollen yields to seduce investors. A fellow might accept next to zero — or less than zero nowadays — in exchange for the sturdiness of a government bond. It is unlikely, for example, that the United States government will walk away from its debt. It has a printing press, after all… and a ruthless monopoly on it.

But a bond from a corporation sinking under the water — that may even fall into receivership? Unlike the government, it cannot print its way out. And any sane fellow demands a yield plenty handsome to justify the risk. “Risk premium” is what professional moneymen term it.

Junk bonds historically promise yields 4–6% above similarly dated United States Treasuries… on average. But now — again, try to grasp it — investors are assuming massively greater risk on investments guaranteed to lose them money.

With the highest respect to writer Walter G. Fuller, dates 1881–1927: These are the days that “try the stoutest burlap in which cats were ever bagged.” Why are investors heaving themselves into such ludicrous realms? You will find your answer in the world’s central banks. They have twisted and contorted the financial system into such monstrous geometries… They have driven yield-starved investors into negatively yielding junk bonds. These yields may be negative, they reason. But not as negative as others.

Explains The Wall Street Journal: “It is a stark illustration of how ultra-loose monetary policies have turned debt investing into a choice about how to lose the least amount of money.”

Now the Federal Reserve is preparing to hatchet interest rates once again. The others will follow… like lemmings to the cliff. And additional bond yields will likely go negative before long. Investors in negative-yielding junk bonds depend on it, in fact. Lower interest rates are central to their strategy.

Analyst John Rubino of the cheerful DollarCollapse.com: “Investors are now extrapolating falling interest rates into the future and playing junk bonds for the capital gains they’ll generate when their future borrowing costs go down.” And so they would stand tall among the dwarves. Rubino concludes, flabbergasted and floored: “This is one of those sentiment shifts that financial historians will single out for special attention when sifting through the rubble of the coming crash.”

The delirium is presently quarantined within Europe. And again, only 14 outfits presently trade at negative yields. But how long before it swims the ocean… and menaces these shores? Perhaps not long, suggests Barnaby Martin, credit strategist at Bank of America Merrill Lynch: “It doesn’t take much for it to go from 14 companies to 30 or 50 or 100.”

But does the junk bond madness indicate the end is upon us? It may, argues old Daily Reckoning hand Simon Black: “When you see JUNK bonds with NEGATIVE yields, it’s likely that we’re probably close to the end of the boom phase.” As always… we shall see. But Mr. Black says he has acquired gold in preparation.

Negatively yielding junk bonds… Today we are coming out flat-footed and declaring it: It is the very limit of madness. Nothing lies past it. But we inwardly suspect that time will prove us wrong… again…”

- http://www.thedailyreckoning.com

Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/07/peak-madness.html

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