This is How Financial Chaos Begins

[marmar]

This is How Financial Chaos Begins
by Wolf Richter • February 12, 2016


[font color="blue"]It’s not contained.[/font]

There are over $1.8 trillion of US junk bonds outstanding. It’s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was “contained.”

Yet contagion has spread from energy, metals, and mining to other industries and up the scale. According to UBS, about $1 trillion of these junk bonds are now “stressed” or “distressed.” And the entire corporate bond market, which is far larger than the stock market, is getting antsy.

The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy, as we pointed out. Today, that average yield is nearly 22%!

Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:



At this cost of capital, companies can no longer borrow. Since they’re cash-flow negative, they’ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues. ...............(more)

http://wolfstreet.com/2016/02/12/how-financial-chaos-begins/

[randys1]

1. I wish I understood this better , but it does seem a huge correction is coming again.

[davidn3600]

3. Market has been overvalued for awhile

So many stocks are overvalued right now. I look at some of these stock prices right now for different firms, and I just feel the instinct in my gut that there is no way they are worth this much.

In order to make money in the stock market, the market needs to keep going up. When the market prices go up faster than the true growth, you end up with an overvalued market. Technically, on paper, this isn't supposed to happen. A stock price is ultimately based on the market capitalization. But as we all know, prices are far more complex than that. There are many speculative forces playing with supply and demand. So overvaluation and undervaluation is a reality of economics.

It doesn't mean a correction will happen next week or even next year. But eventually gravity will win out.

[onethatcares]

4. I wish I understood this better, but

as a mere carpenter, I see that the stock prices are not based on reality thinking. The companies are not doing any type of in depth advancements in their fields but are doing buy backs in order to drive the prices up.

In my eyes, there is no real betterment in which to base a better price on. Or am I naive?

The bottom line is, it's all based on fraud, small scale, large scale or all the savings and investments are but poker chips in the big game.

Thanks for hearing me out.

[JFKDem62]

2. Not really chaos.

It is planned.
Who benefits?