Steve Blumenthal‘s latest Forbes article – “Watch Junk Bonds For Early Warnings Of A New Financial Crisis” – sounds the alarm on the alarming level of risky, interlocking debt flooding the market. Volaility is back and there are naturally questions about the underlying stability of the financial markets. In that regard, Steve’s article is prescient and disturbing. Did we learn nothing from 2008? Are we headed for an even bigger fall? Is it a question of when, not if?
An excerpt:
All of the elements that went wrong in 2008 are far bigger and potentially more harmful today than they were in 2007. The banks are bigger, the derivatives markets are bigger, and the Fed’s balance sheet has grown from $800 billion to over $4 trillion.
What could trigger the next crisis? One likely source is the high yield junk bond market. In the last four years, the high yield bond market has grown from $1 trillion to more than $2 trillion in total market value. It took more than three and a half decades to reach $1 trillion and just four years to add the second $1 trillion. At the same time, credit quality has decreased to ratings that signify “currently vulnerable to non-payment,” “substantial risk” and “extremely speculative.”
Steve concludes:
What can investors do? Own equities but hedge that exposure and overweight to tactical investment strategies. Tactical strategies are far more flexible by design. They look across many asset categories and seek to position in those showing the strongest price leadership.
To balance risks, consider hedging your long-term focused equity exposure and further diversifying your portfolio by including tactical strategies that seek to deliver upside potential with downside protection.
Read the full article at Forbes: Watch Junk Bonds For Early Warnings Of A New Financial Crisis
Related Forbes articles by Steve Blumenthal.
- Stock Market’s High P/E Suggests Lower Returns Ahead
- Why Bonds Are A Buy And Everybody Had It Wrong
- How Not To Get Soaked When The Bond Bubble Bursts
- Code Red In High Yield
