Betting on junk
The FT this morning tells us the junk bond high-risk investment market is back – signalling a boost in confidence. Is a junk bond as junky as it sounds? Apparently it is.
There’s a lot of investors out there, we are told, who are awash with cash and need to put it somewhere, so high yield junk is where it’s going. Very often the investor has no idea what these products consist of – frequently, good debt wrapped in bad debt – bad debt wrapped in good. But, says the FT, investments in this area are up 1.3 per cent. Safer investment in more tangible stuff is down 0.15 per cent.
Has the world moved on? Wasn’t this the market that heralded the worst financial melt down in anybody’s lifetime? How much has really been done to secure all our tomorrows against ‘bubbles’ and worse?
Only last week it was announced that the Basel 3 rules, that were designed to force the banks to recapitalise, were relaxed – the timetable for completion slipped to 2019, and the sums were eased too. All this to allow more investment in growth. But most of the cash that had been going into bank re-capitalisation had anyway come from the Bank of England or, in the US, from the Federal Reserve in the form of QE – quantitative easing. Now QE seems to be going out of favour - it had really been intended for re-booting the economy in jobs and products. It failed to produce much of either.
So now we have turned back to the markets, and junk. Our retail banks into which everyone one of us puts our wages are still hopelessly, and perilously entwined with casino banking which we now see is joyfully entwined with betting on junk bonds.
Shall we run a book on how soon the whole horrible edifice blows up? Someone might make even more than by betting on junk.
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There are 10 comments on this post
The one lesson we can learn from financial history is that people never learn anything from such history
Is it fair to say investors have some kind of gambling addiction, akin to those who waste their money on fruit machines? Same thing, really.
This is not so much a Casino more a kids party. The game they are playing is pass the parcel. The parcel itself is of course worthless but if the portfolio managers can talk it up and create demand the price will rise and more demand is created – when the music stops the investor left with the parcel looses all. Meanwhile the commissions have been earned and the other players have their profits. And the real issue is the last time the parcel stopped it was the taxpayer that lost.
Exactly, “wealth creators” at work…
The reason QE didn’t work was that the money went to the organisations that created the need for it in the first place – the banks. They did not feed it into the economy like poor people would have done.
And in these straightened times, how come there are investors awash with cash? HMRC could look at all
Purchasers of junk bonds, looking for potential evasion.
I guess that the banks still hold a lot of these bonds on their books? So, maybe an increase in activity means that they are selling them? If so, who would buy them? I sure hope it’s not pension funds (I assume they are smart enough to look at more stable investments).
Perhaps if there’s a reduction in emphasis on short-term profits there would be less incentive to create and trade in these. But, I’m no economist and could be talking out of my hat.
And too powerful to jail for robbing us all blind.. Please get Max Keiser and Stacy Herbert on as regulars to explain to viewers what is going on. As I am sure you know, they are brilliant at it – apparently to hot for the BBC btw where Max was dropped in favour of the likes of Peston (whose reports are in jargon and so is not understandable)… Their show on RT is dynamic and they are very funny with it too.
Junk bonds look like a very good candidate for a trial UK version of the Tobin Tax.
Depends what you call junk, which is a fairly infantile term to use really and terribly emotive. If you mean bonds of companies rated below investment grade, then you are referring to a generally rather boring and robust set of assets. Companies in this area include FIAT, Renault, Alcatel, Virgin Media, Lufthansa and British Airways.
Of course, they are associated with higher levels of risk. Hence the higher returns.
These things are rarely held by banks for any length of time and not at all by most banks.
I think your post here is really poor, misleading and silly.
Re capitalisation is important, but I am more concerned about the reserves .