Ben Emons, Columnist

Corporate Credit Market Is a Victim of the Plankton Theory

The likes of Apple and other new issuers are making the market look healthier than it actually is.

July 26, 2017 at 11:30 AM UTC

Ben Emons is the founder of FedWatch Advisors, a firm specialized in analysis and investing around the Fed. Previously he was associated with NewEdge Wealth as head of fixed income and Medley Global Advisors as Managing Director of Global Macro Strategy. The opinions expressed are his own.

Robust demand masks deteriorating credit quality.
Photograph: Scott Tuason/AFP/Getty Images

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Plankton is an essential part of the ocean's ecosystem. Without the tiny organisms, many species would be in jeopardy of going extinct. So, what does this have to do with markets?

Think back 10 years ago when troubles with subprime mortgages morphed into a full-blown financial crisis, as everyone realized that loans to people with very poor credit were the only thing keeping the U.S. housing market afloat. When subprime borrowers were no longer able to meet their obligations, the entire real estate market was dragged lower as prices fell. Not even the high-end segment of the market came away unscathed.

The subprime debacle was a prime example of the "plankton theory" pioneered by longtime bond investor Bill Gross back in 1980. We may be seeing the theory playing out again, this time in the market for corporate bonds.