David Stockman: The Junk Bomb Ticking Beneath The S&P 500

From DavidStockmansContraCorner.com:

The Fed has become a serial bubble machine over the last two decades, and cheap debt is the driving force.

Note that before each cyclical peak of the S&P 500 that junk bond yields plunge into new cyclical lows as measured by the dotted boxes.

And during each of the three bubble cycles shown here the boxes dip lower in absolute terms, meaning that junk bonds and risk have been increasingly mis-priced owing to central bank financial repression.

Thus, with the Merrill high yield index nearing an all-time low yield of 5%, the implication is astonishing.

Namely, that with the CPI having just clocked in at 2.1% y/y, the real yield on junk bonds is barely 3%! 

Yet history proves losses can reach double digits when the bubbles crashes.

During the 2008-2009 meltdown, for example, yields rose from 7% to 23%, implying devastating losses for speculators on leverage and bond funds managers subject to redemption.

Needless to say, those categories encompassed most of the bond holders at the time...
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Link: http://davidstockmanscontracorner.com/the-junk-bomb-ticking-beneath-the-sp-500/