Bond

With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long. For investors, there is little “reward” in the current environment for taking on excess exposure to risk assets. The deteriorating junk bond market, declining profitability and weak economic underpinnings suggest that the clock has already begun ticking. The only question is how much time is left.

We’ve already gotten a taste of what happens when asset classes finally “adjust” to underlying “demand” with the commodity markets: having operated based on Central Bank money printing for five years, they then wiped out ALL of those gains in six months.

Money Week editor John Stepek has looked at the recent mutual fund collapse in the junk bond market and correctly warns that it is a canary in the coal mine.

Earlier today Jefferies reported another quarter in which its Fixed Income revenue could best be described as dismal: Fixed Income posted a nominal $8.4 million in revenue: a whopping 83% collapse from the already subdued $48.6 million a year ago.  The biggest irony is that while other banks are clamoring to be allowed to "prop trade" again, Jefferies which has had the green light to do just that as it never got an FDIC bailout and remains the only sizable pure-play investment bank, just got crushed precisely due to its junk bond prop trading.

Where most analysis on oil markets tends to fall short is on the depth of analysis vs. reading headlines and group think, the latter of which is heavily shaped by misinformed media and government propaganda.

Soaring junk bond redemptions; rising investment grade (and high yield) yields pressuring corporate buybacks; record corporate leverage and sliding cash flows; Chinese devaluation back with a vengeance; capital outflows from EM accelerating as dollar strength returns; corporate profits and revenues in recession; CEOs most pessimistic since 2012, oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity. To Wall Street's strategists none of this matters: as Bloomberg observes, virtually every single sellside forecasts expects "no end to the bull market."

Wall Street’s proclivity to create serial equity bubbles off the back of cheap credit has once again set up the middle class for disaster. The warning signs of this next correction have now clearly manifested, but are being skillfully obfuscated and trivialized by financial institutions. Nevertheless, here are ten salient warning signs that astute investors should heed as we roll into 2016.

News that billionaire Marc Lasry's Avenue Credit Strategies Fund open-ended mutual fund has been slammed with redemptions in recent weeks will hardly ease fears about a capital outflow from the junk bond which has sent junk ETFs down 12% for the year and has become the main topic of discussion over the past week following a flurry of reports about panic among holders of below-investment grade bonds.

The start of the Fed's most eagerly awaited two-day policy meeting in years has finally arrived with the market expecting Yellen to announce the first 25 bps rate hike in 9 years tomorrow with nearly 80% probability, and so far US equity futures are enjoying a last minute relief rally, while emerging market stocks rose for the first day in ten after the longest losing run since June. Europe's Stoxx 600 Index has also rebounded from a five-day losing streak, the worst in over four months.

Despite the low interest rate regime, there are a number of similarities between now and the period running up to the 2008 crisis……

Because when your year-end bonus depends on you not seeing it coming, you don't.

"Yeah but it's junk credit... who cares! I am invested in solid megacaps and even solider FANGs - what can go wrong?" Well, this...

"either the Fed achieves its goals quickly to a very low terminal Funds rate. Buy bonds. Or they need to be even more aggressive. Buy even longer duration bonds. The choice is more about where to put the long leg of the curve flattener not about whether to steepen or flatten the curve."

Jim Cramer - of all people - warned about this in 2007: watch the video inside!