School of Junk
The beat goes on at Moody’s where Ireland was downgraded yesterday one notch to Ba1 – if I hear one more muppet scream “junk status” rather than using the correct term “sub-investment grade” or “speculative grade” I’ll go mental. I’d bet ten to one that not one out of ten people asked – that’s in the markets – really know what the significance of the move from investment grade to high yield really is. D’ya wanna know?
Under old US investment regulations, discretionary money - frequently known as “widows and orphans” - was not allowed to be invested in anything less than investment grade product. That was the cut-off which meant that sub-investment grade securities were targeted at a significantly smaller audience. Hence the leap in yields as a borrower’s paper dropped through the net.
The term “junk” was introduced to financial language by accident from, I believe, an article in the WSJ in the late 80s which used it as a description of the funding used in the sort of hostile LBOs driven by Michael Milken at the now defunct Drexel Burnham Lambert – that was when corporate raiders, the most hated men in the world, ran up the Jolly Roger, well before they brushed themselves down, occupied suites in Mayfair or on the Avenue of the Americas and renamed themselves “Private Equity”.
Sub-investment grade and junk are not the same but in a world of sound-bites, full of people with the attention span of a gnat, it fits perfectly. Incidentally, just as Italian bonds moved into positive territory yesterday, some sales muppet could not resist sending out a message asking “Risk on?”. Grrrrr!
Anyhow, while the street was self-immolating yesterday, real money was sitting on its hands “assessing” the situation. I look forward to seeing today what the result of that assessing will be.
More sitting on hands?