FYI: While the ever-climbing U.S. stock market (and the bubble forming in it) has been stealing most of the investing public's attention, a dangerous bubble has been forming under-the-radar in the corporate bond market. Interestingly, this corporate bond bubble is one of the main reasons why the stock market has been consistently pushing to new highs, and it will also eventually prove to be its undoing. In this report, I will show a variety of different charts to help explain the U.S. corporate bond bubble and the risk it poses to the stock market and economy.
Regards,
Ted
https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s-is-experiencing-a-dangerous-corporate-debt-bubble/#2a2d9584600e
Comments
You referenced a terrific article that summarized the causes of a bubble formation. It provided ample charts as supporting documentation. Thank you for referencing this short, easy to read, and logical article that addresses a complex and highly interactive part of the marketplace. Booms and busts have always reflected our market economy.
Although I read the book many years ago, the article finds the same root cause for the bust feature of our markets as did "Manias, Panics, and Crushes" by Aliber and Kindleberger. Their model is that the investment crowd sees others making bundles of money and fears being left out of this wealth winning game. They borrow far too much and overspend. Too much money chasing too little product drives up prices. After some undetermined period, a few wise folks pullout and crashes follow. Hence the bubbles and crash cycle.
Although history never precisely repeats itself, the echoes of the past do. Our memories are short and we are slow learners too. Many successful FMO members do not follow that deadly pattern, but unfortunately many do. Good luck in understanding the market's puzzling timing mechanisms.
Best Wishes
Apple and Oracle are two corporation (linked article below) that are trying to shed their ST corporate debt creating a "hole" in the bond market that other bond buyers are unwilling to fill. When debt is callable it can be "called" away, but how do corporation come up with the cash? A heavily indebted corporation (AT&T comes to mind) will have to pay the piper instead of the shareholder when deciding what is more important, A dividend, a stock buyback or the paying down of debt.
Article:
apple-oracle-dump-bonds-and-create-300-billion-hole-in-market
AT&T Heavy Corporate Debt:
time-warner-deal-adds-to-atts-heavy-debt-load
Other Corporation with High Debt:
corporate-debt-is-at-new-highs-and-these-companies-owe-the-most.html
As share volumes came rushing down, prudence in all investment decisions rose as a reciprocal. Solid enterprises began to reconsider their investment commitments. Banks were suddenly cautious. Borrowers had been caught in the market. Better to have plenty of cash. And individual investors, their fingers badly scorched, were also poor prospects for the new issues of securities.
The blight on consumer expenditures was equally severe. Those who had been spending capital gains no longer had them. Many not directly affected thought it prudent to behave as though they had been."
John Kenneth Galbraith: Money, Whence It Came, Where It Went
(Houghton Mifflin Company, Boston, 1975, pg 184).
[Lightly edited for brevity and to accent relevance to the present time.]
Not to say that any of those are necessarily going to happen anytime soon ...
Catch
Short FWIW version: over the past 3y, it's grown beyond the 2009 GFC peak (43% vs. 37.5%). Mid/small caps and foreign have smaller but still fairly significant ratios.
The disclaimer in the article: "... average debt/capital is limited in its utility to a degree. What matters as much as a company’s debt/capital is its interest coverage and cash flows. Some companies, such as utilities, tend to have fairly high debt/capital ratios, but they can generally afford to given their predictable cash flows."
Regards,
Ted
https://www.mutualfundobserver.com/discuss/discussion/43260/m-u-s-equity-funds-seeking-shelter-from-high-corporate-debt#latest
When someone links an article, common courtesy dictates that you don't step on their toes by linking the same article. That can be avoided by scrolling for the article title, or using the search function. I don't half to worry about that when it come to you. The vast majority of time, you simply make stupid comments rather that link some information of value that can help MFO members become better investors.
For the record I suggest you ask Roy Weitz and David Snowball what contributions I have made to FundAlarm and MFO Discussion Boards compared to you. I don't think you would want to hear their answer