Market Fizzling, Changing Tides - Still Cautious
For the past few months I have been warning about the next upcoming GFC-style collapse that will occur within the high yield corporate bond market (junk bonds) and emerging markets. It feels like I have written about nothing else.
On Friday one of the largest high yield bond funds – run by Third Avenue – closed the fund to redemptions citing illiquidity in the underlying market and the inability to meet outflows. This is significant. The cracks that I have warned about for global financial markets are growing wider, deeper and multiplying. There is about $1.4 trillion worth of junk bonds floating around in the system and the Third Avenue fund at its most recent peak managed about $2.5 billion.
The chart below of the High Yield Corporate Bond ETF (HYG) that I have repeatedly shown (since May!), collapsed to new lows and having highlighted previously the correlations between junk bonds and equities – it’s no surprise to see the Dow Jones decimated by more than 300 points and the ASX 200 breach 5000 again on Friday.
Corporations having borrowing outside their capacity to repay just in the same way US home buyers did so in the lead up to the GFC. Emerging market countries have done the same and are suffering a similar fate with massive outflows for the first time since the mid-1980’s. Almost all have budget deficits based on excessively optimistic revenue expectations. Unfortunately as growth rates, exchange rates and commodity prices deviate from their forecasts these deficits balloon, so too debt levels.
South America, South East Asia and the Middle East/Europe all look extremely toppy and in my column at the end of this week I will run through a ‘chart pack’ that makes it difficult to build a positive outlook. These charts will cover bonds, equities, corporate debt etc – showing that as I have suggested before – the bull market is complete. I termed markets in recent months as late stage bull markets, but now leading into 2016 the end is complete and investors need to be prepared for a steep correction.
Some of the areas of the local market that I see as extremely vulnerable are the money managers. These companies are directly related to the sentiment and performance that surround financial markets. The conditions they have experienced over the past three years have been as good as they get. However, as I have discussed and predicted there are shifting sands that are warning these conditions have changed. As a result the gravy train for this sector is poised to run dry. Bankers Trust, Platinum Asset Management, Perpetual, IOOF, Magellan, AMP – all are on the cusp of serious downturns.
They are priced for perfection with excessively high price/earnings multiples and when considering the sharp falls that are occurring in US money managers when the S&P 500 is still near its peak is again telling us something is afoot. Equities are almost always last to react to underlying global developments and if we learnt anything from the GFC – then let it be, pay attention to asset classes and financial instruments diverging away from equity markets.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.