Just look at the implied appetite for consumer debt in the early 1990's in the chart above. Shifting from the consumer to the corporate side of the unfolding credit cycle if you will. The reason we preface the corporate view of the world with the consumer is that the consumer ultimately effects the corporate credit outlook. As we describe on our managed account activity page, we have stayed away from junk debt investing now for two to three years. Conceptually, we want to play in the garbage dump at or near the bottom of an economic cycle, but avoid toxic junk debt near a top.
Cash flow is king in junk land.
We want to know just how bad cash flow can become before we commit capital in this area. Given the excesses in credit creation over the past decade or so, there are sure to be plenty of DOA candidates in junk land over the next few years, but invariably there will be opportunities. We're not committing a penny quite yet. What we do suggest is that investors begin to do their homework here. The junkyard is beginning to attract our academic interest.