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Is a Market Cliff Ahead?

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    WSJ Financial Editor Francesco Guerra on concerns about the market’s outlook.

  • Duration 4:19
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This transcript is automatically generated

He should Bonnie.

We are as you know look at the lower ticker getting close to reaching a new all time high on the Dow and the S&P in the NASDAQ -- Very good five years after just a devastating.

Market disaster but don't start celebrating just yet because our next guest says.

There could be another crisis brewing in the market was that I was against -- -- -- that I wanna hear that but.

Of course we can't deny what might be out there.

Joining me now is a man who wrote -- financial editor for the Wall Street Journal for Tesco -- -- and and you said there's just.

In certain areas in four areas in particular too much but believe behavior but does that really mean we're going to see another financial crisis.

It's not necessarily but I think you and we were gonna be concerned about this it's interesting how we overlooking the stock market and that they the ways I'm seeing the -- behavior coming copies in that credit markets and that's of when in fact the last financial crisis -- -- And we gonna be very careful because we -- seeing investors taking liberties -- the risk.

And that trying to seek -- -- in places that I didn't riskier and riskier.

Okay we're going to point out for our viewers the fourth things that you're noticing right now that -- you.

Number one too much leveraged finance where do you see that describe what that me.

So you get a look at two things straight one is a huge amount of junk bond issuance that we are almost a record highs of John bond issuance remedies are companies issuing bonds of that rate they're the molding wrestling greats of that among -- -- -- company's.

And you see the price of this bombs are getting very very -- therefore investors are willing to take more risk.

For less reward that's that's interesting point that he's going to be may be carried very careful.

Where I see the problem he's not so much -- -- itself it's as a percentage of total bond issuance is junk bonds.

Are a lot and that history shows that when that happens we're in kind of a bubble behavior.

Okay there's also short term financing stresses that worry you things like repo transactions.

That while they are what you lead down to half of pre 2008 levels so I would say so what what's the big deal.

You're worried why.

I'm worried about -- but mostly worried about it yet I think in order to find -- -- -- banks as -- it's like yeah.

It's it's a way -- -- banks and and other financial companies get very very short term funding by.

Giving securities and getting money back and continuously doing -- the problem what happened the last financial crisis.

The music stopped.

And people were left with either money they could repay we'll securities that went well worth very much effect Alan Blinder wrote the popcorn and and you -- Scott it was just on a couple of days out.

-- but what's different about this talk.

I think I think what -- we seeing this time is that there's a lot off.

Liquid investments like exchange traded funds you know everybody has them being the editor thousands -- them they're very popular very popular especially the ones that buy junk bonds and that they H -- Jeanne exactly this is limited those everybody's buying them they offer good returns -- probably that he's got liquid.

Look at this difference and would not reits real estate investment trusts.

Buying mortgage backed securities which got some into trouble back in the original Arab back on the day of 20067.

And eight.

Fifteen billion in 2000 ballot 400.

Billion do people just not.

Why -- people love of people all lured by the every -- that they look he's -- -- -- treasures are are yielding so little.

People are looking for ways to make money it's an entirely rational.

The problem is as you do that you go further and further down that risk path and then there -- the banks use save banks portfolios have levels of securities that telling you -- to the banks are very difficult because it particularly.

And and -- trans -- Aren't but would you can see is that they holding these securities them very very long term.

And that's a good thing because they're getting good returns the problem is.

When interest rate rise they will lose money in the securities so if we keep a lot of that mean that you'll see those balance sheets being depleted.

Well don't say we didn't warn you at least -- French -- right.

What do you think this'll happen is -- do you think that's a big question tipping point that the people will be when that interest rates are rising allies and and that is something that -- Cohen -- Goldman Sachs as worried about because everybody's piled into treasuries for safety at some point when they uptick.

Is it just a tenth of a basis point that would worry yourself a little bit I think what's more it would be the magnitude and the speed so to goes up by a lot of very quickly then -- -- -- Francesca Guerrero of the Wall Street Journal and there you see the ten year yields coming back a little bit closer to the highs of one year thank you so much thank you.

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