Stocks chopped sideways today, as the news was of little consequence. And since none of the ongoing wars intruded into the headlines further than a celebrity death, all was ok if not good.
As you may have heard, junk bond funds just experienced a six sigma event. That means that it was not just your usual walk in the park. The pros were quick to dismiss it as retail, read uninformed, selling.
"High-yield bond mutual funds saw outflows total an eye-popping $7.1 billion last week. "HY flowmageddon," said Goldman Sachs' Charles Himmelberg in a research note we saw via @lebullmarche. "This is the largest HY outflow on record – a 6-sigma event when flows are scaled by mutual fund assets under management..."I tend to think of it this way. The Fed's protracted ZIRP has caused an unusual number of people over to the port side of the boat. So many people in fact that the captain and her crew have noticed that it is listing dangerously. Before something calamitous can happen, and all those people fall overboard, endangering the ship itself, she would like to do something to prompt some of them to move to the starboard side. Slowly. If they start rushing starboard in a panic, the boat may lose its balance and begin to wobble dangerously.
Gundlach stopped short of saying high-yield looked attractive. Himmelberg didn't. "Our confidence in the buying opportunity in the face of retail selling stems from our belief that credit fundamentals remain supportive, while valuations are now more attractive," Himmelberg said.
And that is not even discussing other paper assets, like stocks, and the big shifting cargo down below, the derivatives. The ship will most likely be fine, as long as the seas remain calm. Let's hope the gales of November are not early.
It is easy to go for clicks, and to preach impending doom. But I do think that we are in a precarious situation, and a correction to it is coming. I suspect we will see something in fourth quarter, but there is still some time for the learned captain and her crew to do something sensible, even if the owners of the ship are still happily ensconced in their VIP cabins, while their servants rifle the passengers' luggage.
There is no doubt that the Fed is worried about 'secular stagnation.' In keeping with our passenger ship analogy, that means that everyone who has been downgraded temporarily to steerage for the emergency will have to stay there because their cabins have been appropriated and used to make room for even bigger suites and entertainment quarters for the VIPs and their stewards. Ouch.
Have a pleasant evening.
