The Corporate Bond Bubble


Pretty much anyone following investments and whatnot should have no trouble seeing the growing disconnect between stock prices and actual business prospects in the real economy. If they don’t, they are probably being paid to lie to you. Read or listen to someone else!

For example, while we know stocks are making new highs, business CEOs are shunning investment in future business prospects. In Why Corporate America can’t Prop up Stocks much Longer, Casey Daily Dispatch says, “large U.S. companies are acting like very tough economic times are ahead.” They explain that the recently closed quarter was, “the third straight quarter that business investment (on property, plant, and equipment) fell.” Then they point out,

That hasn’t happened since the 2008-2009 financial crisis. We wouldn’t see this if the economy was headed in the right direction. Companies would be building more factories. They’d be buying more machinery. They’d be spending more money on research and development.

Instead, companies have cut back on investments. This tell us they don’t see many good opportunities. That’s a bad sign for the economy, yet stocks keep rallying. …

According to the popular CAPE ratio, stocks in the S&P 500 are 62% more expensive than their historic average. Since 1881, U.S. stocks have only been more expensive three times: before the Great Depression, during the dot-com bubble, and leading up to the 2008-2009 financial crisis.

So what has been levitating stock prices? Corporations have been accessing low interest rates to borrow money. So good so far, but they have not been investing it in future growth. They have been using it to buy back their own shares. “Companies have spent about $2.5 trillion on “share buybacks” since the financial crisis. That is $7 trillion since 2007. This is the lions share of the $10 billion corporations have borrowed by floating bonds starting at that same time, causing,

total debt on the S&P 500 to grow 56% during the past five years. …

According to Barron’s, corporate debt now equals 45.3% of gross domestic product (GDP). The only time this key ratio has ever been higher was in 2009, when it hit 45.4%.

If the economy was doing well, this wouldn’t be such a big problem. Companies would be making enough money to pay their debts. But right now, Corporate America is struggling to make money. Profits for companies in the S&P 500 are on track to fall for the fifth straight quarter. That hasn’t happened since the 2008-2009 financial crisis. …

According to research firm FactSet, analysts expect third-quarter corporate profits to fall 1.7%.

So here is the bottom line regarding stock prices.

According to Business Insider, buybacks fell 18% last quarter. This sharp decline in buyback activity followed a near record-breaking first quarter, in which companies in the S&P 500 spent an incredible $166 billion on buybacks. That’s the second most ever, and the most in one quarter since 2007. …

This is not to say that stocks will fall immediately. If buybacks pick up again or some other major source of buying comes in, they could float up still more. But without an economy, really, how long can this continue on? Do you remember when mortgage borrowing made home prices so hot that rising home prices became something like 25% of the GDP? It led to the 2008 crash.

Harry Dent says that everything, including gold, will fall along with stocks. But Doug Casey thinks that gold will rise precipitously as the final safe-haven investment.

To learn about what Harry says, click $700 Gold?

To learn what Doug thinks you should do about this, watch this free video.

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Biding my time in central ms ... yours too, if ur reading this.
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