“Time to Leave The Party” – Former Lehman Insider Warns “More Risk than Reward” in Markets
The comments below are an edited and abridged synopsis of an article by Tyler Durden
“There’s an art to knowing when to leave the party,” warns Pilar Gomez-Bravo, a portfolio manager at MFS Investment Management with $4.5 billion AUM, who sees eerie similarities between the current frenzy for risk and the speculative mania that made her cautious on the eve of the last bubble.
She’s selling junk bonds in a contrarian bet that the debt rally is on its last legs—with the potential to trap funds with billions staked in levered and often illiquid assets—cutting high-yield exposure to 10% from as high as 30% in 2016, in one of her unconstrained funds.
“There’s more risk than reward right now,” she said. “There are real end-of-cycle fears about what performs.”
From her vantage point, she sees that the opacity and leverage of junk issuers is at a tipping point.
We saw this when Lehman went bust, and Gomez-Bravo was a portfolio manager at its investment arm, but before that, in May 2007, Gomez-Bravo became cautious on US risk and issued warnings on corporate health, which echoes with the intense hunt for yield today.
“Everything was bid indiscriminately,” she recalls. “I knew things were heating up; there were telltale signs. It’s always difficult to leave money on the table, but as a result, we avoided the blow-ups.”
So as far as knowing when to leave the party this time, we come full circle with Gomez-Bravo’s current warning: “In fact, it’s over—people are desperate and they’re hunting down the after-party. We probably only have a few hours left.”