Chasing daydreams has always been a favorite pastime for many people including the famous, the infamous, or even Joe Sixpack.
In fact, an entire award winning musical entitled “Man of La Mancha” was written about one man’s quest for “The Impossible Dream.”
Speaking about dreams, for several years we agonized as ex-pro football great Brett Favre kept us on the edge of our seats as he contemplated retirement.
Favre was long past his prime but he hoped for one more day in the sun.
More recently, rumors abound that former baseball great Roger Clemens, fresh off his “not guilty” verdict, is testing his arm in order to determine if he’s still up to major league speed. Indeed, history is filled with those who simply can’t recognize the greatness is over. (After which comes decline, failure, and even embarrassment.)
So it is in the world of investment.
As the zero-interest rate policy of Ben Bernanke has pervaded the scene, individual investors have been driven to seek yields in order to supplement their pension or Social Security while pension managers watch as the ZIRP creates havoc on 8% actuarial assumptions.
All in all, most individuals were pushed to where they didn’t want to go, namely the junk bond market.
Since the heyday of Michael Milken, high-yield bonds have represented the best of times and the worst of times.
Lately, the thirst for higher yields has driven an inordinately large group of people to find solace in this junk bond arena. Never in history have we seen yields on garbage this low, and consequently, prices this high.
Yet, as every bond investor knows, when yields start to move in an upward direction the corresponding action is for prices to move in a lower direction. And keep in mind that historic peaks and historic valleys sometimes reverse themselves in very dramatic fashion.
As Wall Street continues to ignore the realities of the economic tsunami, the clarion call has become “give them what they want, they want yield, give them yield.”
Unfortunately, as both domestic and international consumers retrench and de-lever there will be a culling process which will separate the weak from the strong.
History tells us when that happens; the junk bond environment suffers greatly.
Those who buy into the peak are destined to suffer the same fate as those washed-up athletes looking for just one more season.
Regrettably, for those that choose to buy at high price levels embarrassment will be the least of their problems.
This is exactly the reason it’s called “the impossible dream.”
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