CARL ICAHN WARNS: I think the meltdown is only just beginning
The sell-off in high-yield - aka junk - bonds, issued by companies with relatively low-credit quality, comes in the wake of Third Avenue Management telling clients that they would not redeem money from a bond fund due to, among other things, "a general reduction of liquidity in the" bond markets.
"Unfortunately I believe the meltdown in High Yield is just beginning," Carl Icahn warned in a tweet.
This issue of market liquidity - or the ease at which investors are able to buy and sell assets - and the worry that it could suddenly evaporate has been on the minds of market experts for quite a while. Without sufficient liquidity, there's little to prevent the price of an asset from crashing amid a forced sale.
So it's certainly worrisome that a major fund would block clients from redeeming money because of liquidity issues.
"Who will get in if you can't get out?" Janus' Bill Gross asked rhetorically. "Risk off."
Danger ahead
For months, Icahn has been warning trouble was coming to the financial markets.
In a video titled "Danger Ahead," the billionaire Wall Street veteran describes the major problems coming out of Washington and Wall Street to argue that what's coming next will be "very dangerous and could be disastrous."
He started by explaining why Donald Trump had become so popular in the presidential polls. It boils down to a frustrated American public, angered by how little reform has been passed to stimulate growth. Two key issues Icahn argues must be addressed are the carried-interest tax loophole for investors and the exorbitant repatriation tax that discourages multinational companies from bringing their profits back to the US.
For the financial markets and the economy, Icahn says that the core problem is the Federal Reserve and its ultra-easy, zero-interest-rate policy. While Icahn credits the Fed with getting us out of the most recent crisis by using these policy tools, he also argues that it was the Fed that got us into that crisis to begin with.
Icahn observed that while low rates are intended to boost business investment, in reality they have actually led corporate managers to employ financial engineering and accounting shenanigans to boost earnings per share.
Icahn offers a straightforward and chilling summary of what he believes to be an unsustainable and fragile set of circumstances that are propping up the stock market. And in the end we're left wondering whether we could repeat what we saw during the financial crisis. Or worse.
Below is a summary of Icahn's warning about the stock market.