Everyone is so focused on looking at the Fed and whether or not it decides to raise rates by a puny 0.25%, that they are completely overlooking the fact that it is the market’s role to set interest rates, and if the Fed is not up to the job, then the markets will eventually take over and do it in a manner that is likely to involve rises vastly greater than a mere 0.25%, which given the current fragile and extremely unstable debt structure, can be expected to have catastrophic consequences.
The chart for Junk Bonds looks terrible – and it is already right at the point of breaking down from a big top pattern. This frightening development doesn’t seem to have been noticed by many people, but it portends rising yields first on low quality debt that will lead rapidly to a severe credit crunch that will work its way back towards supposedly higher quality bonds and Treasuries, causing a bond market crash and rising rates at the worst possible time when the world economy is in the throes of a deflationary implosion.
Let’s now look at the long-term 8-year chart for the imperiously named SPDR Barclays High Yield Bond ETF, or in other words “The Junk Bond ETF”. On this chart we can see how, after rounding over beneath a big Dome Top, JNK is on the point of breaking down beneath key support at the lower boundary of the top pattern, which can be expected to lead to a plunge. On this chart, the drop of recent days doesn’t look at all dramatic, and furthermore we can see that it potentially has much further to fall – it could easily plummet back into the low $20’s.
If this assessment of the outlook for Junk Bonds and debt generally is correct, then the most important thing that investors and ordinary citizens should do is to get out of debt or reduce it as soon as possible. Debt made sense during the “risk on” epoch when interest rates were kept artificially low for years, as you could borrow at very low rates to play various asset bubbles such as property speculation and stocks, but with this “golden age” looking set to come to an abrupt end, it’s time to liquidate and pay debt down before rates start to soar.
Originally published on September 28th, 2015.
Reprinted with permission from CliveMaund.com.
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