The media had some fun this week when fresh Canadian finance minister Joe Oliver made an appearance in Europe. Summoning the ghost of former Fed Reserve chair Alan Greenspan, Oliver warned that investors are taking on too much risk in these dodgy, odd markets of 2012.
It was, of course, Greenspan who famously suggested at the height of the dot-com mania of the late 1990s that investors may be indulging in what he termed, "irrational exuberance." Fast forward to Europe this week when Oliver warned of an exceptionally risky investment climate and suggested investors could be investing too heavily in risky assets. "We've said again and again ... that international financial markets are still fragile," Mr. Oliver told Reuters in London. "If it looks like there's such a desire for yield that [investors] overlook the risk ... that is something that can be a concern."
And so followed the comparison to Greenspan’s famous phrase, “irrational exuberance” in a couple of different media reports.
Might ol' Joe be on to something? A recent commentary from some who follow the notorious Elliot Wave theory (market gnomes and druids that use trend lines and Fibonacci sequences to divine technical market patterns) suggest that the low interest rate environment has seen yield-hungry investors flock into some extremely junky bonds. "The strongest demand for debt is for bonds of companies that are the dregs of the corporate credit ladder…2014 is on track to become the biggest year ever for the issuance of collateralized loan obligations, which are the largest buyers of junk debt….more than 70% of all money flowing into exchange-traded bond funds last week flowed to junk-debt ETFs. Frankly, this behavior is crazy,” according to a commentary from the Elliott Wave Theory site published early in June.
Almost 60% of new leveraged loans sold in the U.S. in 2013 were "covenant-lite" loans (that is, loans with few very few conditions...a concept last popular in pre-recession 2007). “Even as the sales of covenant-lite loans soar…the quality of these loans has reached an all-time record low. The message of all this high-risk borrowing is that complacency about the economy and financial markets is near an all-time high. Almost no one fears that high-risk bonds will default…The junk bond market did not even exist prior to the 1980s. In 2009, investors were deathly afraid of them. Now they cannot get enough of them. They are only thinking about yield; they are ignoring risk to principal. ... Fundamentals have not just weakened a bit but rather are awful,” according to Elliot Wave druids. And, of course, Joe Oliver.