-- Published: Thursday, 28 January 2016 | Print | Disqus
By Graham Summers
Investors today are focusing on the wrong asset class.
Stocks started off the year with one of the worst drops in recent memory. As of this morning the S&P 500 was down over 7% for the year thus far.
However, while stocks grab the headlines, it is the bond market that warrants the most attention.
Firstly, size. The bond bubble is $100 trillion in size. To put this into perspective, the Tech Bubble, the single largest stock bubble in history relative to profits, was just $16 trillion in size.
Beyond this, there are $555 trillion derivatives trading based on interest rates (bond yields). So that $100 trillion in bonds is leveraged by an additional five to one.
In simple terms, as much as CNBC and others focus on stocks, the bond market, particularly the bond bubble is a much larger, more pressing problem.
Especially since it has begun to burst.
Junk bonds were the first “shoe to drop.” They’ve taken out their post-2009 bull market trendline (blue line) as well as critical support (green line).
Those who claim that this is primarily an issue for Oil Shale companies are wrong. The defaults are coming across the board with Energy companies accounting for less than 33% of defaults.
This was the fuse that set off the global debt bomb.
The next shoe to drop will be Emerging Market Bonds, specifically corporates.
Emerging Market corporations have over $3 trillion in excess debts according to the IMF. This is likely a conservative estimate. Globally the US Dollar carry trade is north of $9 trillion. And Emerging Market corporations were issuing US Dollar denominated debt at a staggering pace post-2009.
Now you may be asking, “if the bond bubble has burst, where are the headlines?”
Stock market bubbles take months to unfold. The Tech Bubble was isolated to one asset class (stocks) and even more specifically, one industry (Tech Stocks). It sill took three years to unfold.
Bonds, in contrast, are the bedrock of the entire financial system. They, specifically sovereign bonds, are THE asset class against which all risk is priced globally. This mess will take months if not years to unfold.
Junk bonds were first, emerging market corporates are next, then maybe municipal bonds and eventually sovereign bonds. By the time the smoke has cleared, stocks will be at levels below even the March 2009 lows.
Another stock market crash is coming. Smart investors are preparing now in anticipation.
Chief Market Strategist
Phoenix Capital Research
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-- Published: Thursday, 28 January 2016 | E-Mail | Print | Source: GoldSeek.com