On the Bubble

When all is said and done, barrels of oil spilled in the Gulf of Mexico could possibly be in the billions, not millions. Watching the oil continuing to gush would lead even the most unsophisticated observer to the conclusion that trouble continues to brew.

Listening to Standard & Poor’s officials discuss ratings of European countries, including the UK, would lead even the most unsophisticated observer to the conclusion that trouble continues to brew. (Did I just repeat myself?) The UK has just announced an emergency budget, Spain needs additional measures to met fiscal targets, France has announced high deficits, and Greece continues to melt like the Wicked Witch of the West.

However, keep in mind, that while the aforementioned events are headline news, little notice is being taken of the increasing expansion in spreads between investment-grade bonds and junk-bonds. In April, the height of the bear market rally and when complacency was at its greatest, the difference between yields of investment-grade bonds and junk-bonds was the lowest in many years. In other words, there was no reward for taking risk, and the market bubble in junk-bonds had reached historic proportions. Like all bubbles, such as dot-com, housing, oil, and tulip bulbs, few recognize the environment they’re in until it’s too late. (Although, I might add that very quietly, a few smart money types are in fact leaving the bond risk-trade and re-entering the safe haven of U.S. Treasuries.) Unfortunately, the general public, just like in all other bubble situations, will recognize their mistake after the fact. Once again, too late.

Alas, if only on careful examination, even the most unsophisticated observer will be left with the conclusion that trouble continues to brew.

Till next time,

Bill


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