Corporate bonds are the IEDs of the Federal Reserve’s monetary policy and central economic planning that will soon detonate on Wall Street, says David Stockman, former Reagan budget director and bestselling author of “The Great Deformation.”
Writing another extensive, in-depth piece on his Contra Corner blog entitled “Corporate Bonds Are The IEDs Of Monetary Central Planning: They Will Be Exploding Along Wall Street Soon,” Stockman explained that corporate bonds are on the verge of exploding and the Fed’s loose monetary policy has been a major factor to this.
Stockman averred that the central bank’s financial subjugation has created a historic jostle for capitulation and it is embarking upon its seventh consecutive year. In the end, bond fund managers and speculators will be on “the same side of the boat.”
The former Michigan Republican Congressman noted the Fed produced an “artificial one-way market” in corporate bonds across the broad spectrum and that they are priced so low that there is no margin left over for risk. What this means is that if rates start to climb then the bonds will lose money.
In other words, low interest rates will begin to increase because of either the stimulus is retracted or another sell-off transpires, which then leads to the $5 trillion corporate bond market being exposed.
“Accordingly, the exits will be jammed like never before when the corporate bond self-off inexorably arrives. The speed and violence of the impending re-pricing is only hinted at by the thundering collapse of securitized mortgages that occurred in the fall of 2008,” Stockman posited.
“Then the financial IEDs [improvised explosive devices] will explode. Then the bubble-blind Fed will be caught flat-footed one more time. The fact is, its modus operandi is guaranteed to create financial deformations and bubbles, yet its doctrine either denies their existence or asserts an inability to prevent them.”
Citing a Reuters report, several of the largest international investors have already commenced their reductions from corporate bonds, such as Loomis Sayles, GAM and Standish.
“Valuations are getting stretched,” said Jack Flaherty, investment manager at GAM. “You’d rather be early in getting out because when it does turn, it could be more violent than expected.”
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