Recency bias is a real sonofabitch.  After someone goes through a traumatic experience they tend to be shocked into believing that the next big traumatic experience is right around the corner.  But the reality is that outlier events are outlier events for a reason – they don't happen nearly as often as we expect.  For instance, I was in a car accident this past weekend. I was driving in one of these wonderful ride sharing programs when a car sideswiped us blowing through a stop sign.  I was fine (everyone else was not), but as I drove around the rest of the weekend I stopped at every intersection even though there weren't stop signs at them.  Then, three days later I found myself barreling down the I-5 like normal after the trauma and recency bias had passed. ¹

There's been an incredible amount of recency bias following the trauma of 2008.  The next big crisis has been around the corner ever since.  And this brings me to the junk bond market.  In his recent video Carl Icahn compares today's environment to 2007 saying that the crisis wouldn't have been as bad if more people like him had spoken out. I don't think that's actually true at all since the mortgage crisis was in motion long before anyone with substantial influence could stop that.  But he specifically notes that the junk bond market is going to become a “bloodbath” at some point in the coming years.  Let's look at some data for a better perspective.

Here's a chart showing the size of the mortgage market and the junk bond markets in the USA.  The red line is the quantity of mortgage debt issuance as a percentage of the total bond issuance and the blue line is junk debt issuance as a percentage of the total.  While junk has risen substantially in recent years you can see a pretty stark difference here.  Junk bonds are a relatively small slice of the overall pie whereas mortgage debt is massive.