WIND-AIDED FOLLIES

 
Defenders of the Greenspan-Bernanke-Yellen-led Federal Reserve Bank claim the Fed's policies don't cause asset bubbles.

But a quick look at the junk bond market seems to be saying otherwise. Everyone knows that energy prices have been falling.

Like any water filled balloon, pressure put at one point causes a bulge at another. Falling energy prices help some and hurt others. Those being hurt are not just oil exporting countries, like Venezuela, Kazakhstan and others.

Owing to the Fed's ZIRP or what we call wind-aided follies, investors, as everyone knows, have been pushed into riskier places, like high yielding junk energy bonds.

In most bubbles one or two sectors at most make up a good portion of their respective indices. In other words, the index gets a bit top heavy in that sector.

Back in the good old high tech days something noted then as TMT, technology, media and telecommunication stocks, made up a large proportion of the S&P 500. That is, they did before the bubble burst.

There have been numerous other examples to make the point. Money flows to where it flows. It's almost a staple of markets.

Well, if you've been tracking low-rated energy junk bonds recently you know they've taken a hit since oil prices started their swan dive. 

For the last nine of 10 years much of the U.S. oil and gas shale industry that folks like MSM and others love to celebrate has been propped up by cheap, low-rated junk bonds.

According to today's Financial Times, those low-rated, cheap, higher yielding bonds yield-starved investors have been chasing-- thanks in part to central bankers--comprise nearly 16 percent of the $1.3 trillion junk bond market.

In 2004 that same sector accounted for less than five percent. Even by our feeble grasp of mathematics that's about a four-fold increase.  

According to a recent Fortune article, The 10 largest public U.S. energy stocks lost $297 billion in market cap between June and October. To put this into perspective, we’re talking about the equivalent of the market caps of Disney, Ford, Starbucks, and General Mills being vaporized in just a few weeks. Exxon Mobil XOM 0.06% lost $75 billion alone from the peak to the trough of the energy stock selloff.

Market cap is a proxy for percent of an index. Even in 100 meter sprints there's something  known as a wind-aided time. It usually gets corrected.