Mr. Market and Mr. Trouble - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 6 March 2014
Mr. Market and Mr. Trouble A  A  A

Baltimore, Maryland

Dow down 35 yesterday. Gold up slightly. A dull day on Wall Street, with investors holding on to most of Tuesday's gains.

And here's another record that was broken recently.

In the early '80s, Michael Milken pointed out that junk bonds could be more profitable than those with an AAA rating. The junk bond market was tiny...with total issuance only rising to about $30 billion in the mid-'80s. Milken was basically right, as subsequent events proved. But that didn't stop the feds from putting him in jail in 1990.

The junk bond market continued to grow. At the end of the '90s, issuance was hitting records - at around $150 billion. Then, bond issuance collapsed with the tech bubble. But unlike tech stocks, high yield bonds were soon flying higher than ever. In the middle of the 200-2007 period, annual junk bond issuance rose above the $150 billion mark. But in 2013, the junk really topped the charts, with about $330 billion of new bonds issued.

--- Advertisement ---
Regular Income or Long-term Growth Potential... Why not both?

One set of stocks that we own have the job of creating long-term wealth for us...

While another set is bought to create regular income instead.

However, there is a third kind that is capable of doing both these... together!

In other words, regular dividend-paying stocks which have immense long-term growth potential.

And we have 3 of these "Rare" Small Caps you could Buy today.

To know how you can get full details on these 3, click here...

Why so much junk?

Ah...for for so much else, we have the central bank to thank. Lower yields caused lenders to stretch beyond their comfort zones for higher rates of return in lower quality issues. In 2007, they were driving into bad neighborhoods to get what they needed. And by 2013, they were dumpster diving for a measly 5%.

Can you blame them? As more and more liquidity (buying by the Fed) became available there was less and less reason for anyone to default. A mismanaged, zombie business didn't need to stop paying its coupons; it just had to borrow more money. Borrowers and lenders were both deceived; the former found lenders unusually motivated; the latter believed borrowers were uncharacteristically solvent.

All of which just serves to highlight our latest dictum: the Fed's $4.1 trillion balance sheet is a standing invitation to trouble.

Mr. Trouble walks through the door every morning and into a party every night. But he is a master of disguise. One day, he comes with the healthy mien of a robust high yield debt market. The next day he is crumpled over, as if depressed by unusually low consumer price inflation. And on the weekend, here he is again, a big shot from Wall Street with the highest profit margins in 60 years.

Yes, dear reader, trouble comes in many guises and disguises. An honest, properly functioning economy, of course, spots him immediately and shows him the door promptly. But a trumped-up, highly manipulated and mountebank economy is like a Carnival hoedown. You can find anything you want....but nobody is exactly what he appears to be.

Economists refer to this as the problem of 'distortion.' The real cost of real capital is usually signaled by the prevailing interest rates. When Mr. Market is permitted to function normally, investors can take the facts at face value. When the Fed intervenes, on the other hand, the effect is to distort the economy and the markets. Manipulating interest rates downward makes capital seem too cheap. It is borrowed too easily and spent too readily. The result is over-speculation...and over-investment.

That is why we have a record issuance of junk bonds. It is just one more of the many drag queens and carnival kings that have been corrupted by the Fed's heavy-handed meddling in the markets.

On display too is the "recovery' itself - it's the weakest ever! Never before has such a strong recession been followed by such a weak bounce-back. Quarter after quarter, jobs growth, GDP growth and consumer price growth substantially under-perform every recovery since WWII.

Another record! And just one of the many jolly revelers who opens the door for Mr. Trouble when he shows up.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Mr. Market and Mr. Trouble". Click here!


Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.