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Investors Become Greedy: Is a Financial Crisis Coming Soon? Lombardi Letter 2019-11-06 06:18:44 Investors are starting to become greedy. They are buying assets that are risky. This may not end well and could cause the next financial crisis and an economic slowdown. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2019/11/Investors-Become-Greedy-Is-a-Financial-Crisis-On-Its-Way-150x150.jpg

Investors Become Greedy: Is a Financial Crisis Coming Soon?

U.S. Economy - By |
Investors Become Greedy Is a Financial Crisis On Its Way

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A Period of Greed Followed by Financial Crisis & Economic Slowdown

Should you be worried if investors are becoming greedy? Yes. Greed never ends well. An economic slowdown and financial crisis follows after a period of rigorous greed.

Before going into any details, know this: there isn’t an exact measure of how greedy investors really are. However, you can tell how they are thinking by looking at their risk appetite.

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If they are buying risky assets in order to generate higher returns, they are perceived to be greedy.

Go back to the period before the financial crisis of 2008–2009. Investors were getting into trades that didn’t make much sense but offered a decent return. We saw it in the bond market; bonds made up of subprime mortgages were being sold like hotcakes.

Average Americans were buying several houses thinking they would make tons of money. The following common phrase was heard all over: “the housing market never goes down.”

What happened after all this? A massive financial crisis and an economic slowdown followed in the U.S. economy and global economy.

Here’s something you should also know: when investors are greedy, they misallocate their capital. And once they start to see their investments become not as fruitful, they panic and sell. The selling leads to problems all over and eventually trickles down in the economy and starts to take a toll.

Sadly, at the moment, it looks like investors are becoming greedy again.

How can one tell? Look at the riskiest assets out there, and see what investors are doing there.

Junk Bonds Becoming the Next Big Thing

One place worth a look is the high-yield bond market.

Dear reader, “high-yield bond” is  just a fancy name for junk bond. These are the bonds issued by companies that may not survive and could default on their bonds at any time. With a high risk of default, these bonds offer higher interest rates relative to, say, U.S. government bonds.

Investors have been piling into junk bonds.

Year-to-date, between January and September, junk bond issuance in the U.S. amounted to $206.7 billion. In the entire year of 2018, junk bond issuance was only about $169.4 billion. (Source: “US Corporate Bond Issuance,” Securities Industry and Financial Markets Association, last accessed November 5, 2019.)

That means, so far in 2019, junk bond issuance is already up by 22% when compared to the entire year of 2018.

Between January and September 2019, the average junk bond issuance per month was about $23.0 billion. Assuming we see something similar between October and December, total junk bond issuance in 2019 could be around $275.0 billion, 62% higher year-over-year.

But don’t get too fixated on junk bonds.

Remember the initial public offerings (IPOs) that came on the market in earlier 2019? Beyond Meat Inc (NASDAQ:BYND) stock soared several hundred percent. The company making non-meat burgers and sausages saw its market capitalization surge by more than $12.0 billion within a few months of its IPO.

It wasn’t the fundamentals that drove the prices higher. It was investors’ greed and faulty expectations.

I am looking at all this and really can’t help be nervous about what’s ahead.

Right now, investors are rushing for risky assets. If something goes bad, these assets will be the first to take a hit. Will they continue to buy them? Most likely not.

The greed we see these days is not good. It foretells something scary. A financial crisis and an economic slowdown could be upon us. I can’t stress this enough: be very careful.

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