(New York)

There have been a lot of fears about the junk bond market both over the last few years and in recent months. Many worry what a rising rate period would mean for the sector. However, the bigger worry might actually be a recession. Bank of America Merrill Lynch has recently put out a report analyzing the sector, and they highlight a potentially big worry. As many know, over the last decade, companies have gorged on BBB rated bonds (the lowest rung of investment grade), issuing trillions worth. However, the big risk is that in a recession, default rates will surge, profits will fall, and many of those bonds will be downgraded into junk status. When that occurs, many investments funds will be obligated to sell them because of mandates, which could cause a massive exodus and big losses.

FINSUM: The giant BBB market, which has been the superstar of the high yield sector since the Crisis, seems like it might be poised for a serious rough patch come the next recession.

(Washington)

President Trump may have just ended a major part of the current trade war. All eyes have been focused on the President’s meeting with European Commission head Juncker today in Washington, an encounter that could spark trade fireworks between the US and EU. Most have said they have little hope of a positive outcome. Now, that might be entirely changed as the president last night tweeted out what must be the most hopeful statement of the whole trade war. He said “The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them … Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies!”.

FINSUM: It would be absolutely amazing to go from an escalating trade war to a US-EU free trade panacea. It seems unlikely to happen, but it could be a positive sign of collaboration.

(Washington)

The trade war appears to be headed down a poor path ever more quickly, and in response, global stocks are seeing losses. The US is continuing to make threats about ever larger tariffs on its trading partners, and Trump is poised for a tense meeting with European Commission head Juncker in Washington today. The president yesterday referred to tariffs as the “greatest”, and the US put forth a $12 bn support package for American farmers hurt by tariffs.

FINSUM: Stocks don’t know what to do, as this trade war is growing increasingly difficult to handicap. Add to that the uncertain over global central bank policy, and we have a very nervy mix for markets.

(Caracas)

Investors will know that the stock market is supposed to be a good inflation hedge, but precious few developed market investors will have ever seen how a market (or people) actually reacts during a period of heavy inflation. For a practical example, look no further than the misery that has befallen Venezuela. Inflation currently stands at 46,000% and is expected to accelerate to 1,000,000%. The government’s printing presses can’t keep up. But how has the stock market performed? The country’s benchmark index is up 73,000% in the last year. Wealthy Venezuelans are using it like a bank, buying stocks to deposit cash, and selling them when they need a withdrawal.

FINSUM: This is something you read about but rarely see in practice. It is an absolute shame what is going on in Venezuela, but a good lesson about the interconnection between stocks and inflation in practice.

(New York)

One of the big conundrums in markets is that while it is practically gospel to diversify into a wide range of securities and asset classes, some of the best and most famous investors do the exact opposite. As evidence, just consider the investing styles of Warren Buffett, George Soros, or Bernard Baruch. Forbes has published a piece examining this seeming disconnect, and provides some interesting insights. According to Buffett, “Diversification is a protection against ignorance … [It] makes very little sense for those who know what they’re doing”. Baruch adds, “It is unwise to spread one’s funds over too many different securities … Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues”.

FINSUM: Okay, a couple of points here. Firstly, those investors can afford the big losses that can occur with a concentrated portfolio. And secondly, since they invest for a living, they have the time to devote to deeply understanding each of their holdings. For the 99.99% of people not in that group, diversification has major benefits.