Market Volatility Since the 2008 Financial Crisis

Recent market volatility has been the result of the stock market. I expect the next crises in the economy to fool everyone and come from entirely different directions: The bond market and price inflation. It won't happen right away because declining energy prices will subdue the price inflation indices for awhile, but once the energy price declines are factored in watch out.

This is Really the Next Big Bubble: Risky Bond BetsThat Major Bond Funds Will Never Be Able to Liquidate in a Crisis

It is my view that we have likely already started a multi-decade decline in the bond market. It has a long, long way to go. As the decline intensifies over time, it will be the sub-prime market that will experience the greatest shocks, just like the sub-prime real estate market was the most badly damaged when the real estate bubble burst.

When the real estate bubble was still floating, there was so much money around that a lot found its way into the real estate sub-prime sector. The same thing is now occurring in the bond sector.

NYT reports:

Regulators and bank executives have cautioned that an accumulation of hard-to-trade, risky bonds by a small group of fund companies could turn a bond market hiccup into a broader rout, in light of how illiquid many of these securities have become.

Junk Bond Investors

Pimco is one of the largest managers of high-yield, or junk, bonds. But recent jitters in financial markets have raised concern about these types of investments, which can be risky and difficult to trade.

Asset manager’s stake of the

company’s high-yield debt

Asset manager

Debt issuer

1.

Pimco

Ally Financial

37.3

%

2.

Pimco

SLM

29.9

3.

Pimco

A.I.G.

26.4

4.

Franklin Templeton

First Data Corp

25.5

5.

Franklin Templeton

Tenet Healthcare

23.4

6.

Franklin Templeton

Caesars

18.3

7.

Pimco

CIT Group

18.0

8.

Franklin Templeton

Charter

13.5

9.

Franklin Templeton

Sprint

12.6

10.

Franklin Templeton

Chesapeake Energy

11.8

11.

Franklin Templeton

Reynolds Group

11.6

12.

Franklin Templeton

Community Health Systems

11.2

13.

Pimco

HCA

11.1

14.

JPMorgan Chase

Dish Network

10.1

15.

Pimco

MGM

9.7

Source: Moore Capital Management

In my view, this is no time to be anywhere in the bond market, but you have to be particularly insane to be holding subprime ("junk") bonds.