A Bond Bonanza for Shares


US$140 billion. That’s the value of new corporate bonds that hit the market last week.

If you’re thinking that sounds like a lot, you’re right. It was a new weekly record.

What can I say? Another week and the global bond bubble continues to inflate before our eyes.

Investor Jim Rogers once opined somewhere: ‘All big bull markets end in a bubble’. Bonds have been in a bull market for nearly 40 years.

I’d call that big, wouldn’t you?

It’s very hard to see this as anything but bullish for stock markets…

That’s if you’re prepared to ride it out until the end of the year.

Here’s why. Look at some of the borrowers that the Financial Times (FT) cites as raising money: Apple, Disney and Berkshire Hathaway.

These companies don’t need money to fund their operations or expansion plans. They have more money than they know what to do with.

US corporate borrowing costs are now back to where they were in 2016. That is to say, lower.

What are they doing with the money?

The FT says: ‘By and large, US companies said they would use cash raised to repay other debt and extend the maturity of the bonds...rather than increasing leverage.

There is something rather hilarious about this. None of this paper shuffling is doing what asset markets were designed to do: finance capital formation!

Meaning, it won’t lead to more factories, offices or hiring.

But it will likely trigger a lot of option bonuses!

The world appears even more ludicrous when we read that a recent study found a third of ‘foreign investment’ is simply multinationals dodging tax.

Still, this isn’t our beef for today. Let’s focus on the outlook of the share market.

You don’t need to be Einstein to figure how this can help bump up their earnings through a lower cost of debt.

We can also assume that US companies will keep buying back shares while this cheap money keeps flowing. Both of these look bullish for the stock market in general.

This also allows for a third reason to be ‘cautiously bullish’.

All year we’ve stood firm on this at Profit Watch headquarters.

One US fund manager I read, said it’s likely US asset managers will soon rotate out of expensive bonds and back into ‘cheap’ equities.

We’ll soon see if that’s true. But the idea makes sense to me.

That’s not to say volatility goes away. I don’t expect anything but a wild ride when it comes to stocks.

But if you can handle the feeling of riding the macro rollercoaster, then we can get on with the business of finding good stocks to back.

There’s certainly enough cash sitting on the sidelines to keep shares going higher.

That’s if Rob Kapito, the head of asset management firm Blackrock, is on the money.

Señor Kapito says there’s US$50 trillion in cash sitting around looking for a home. The problem is lack of investment opportunities for it.

However, it was another point of his that caught my eye. It’s his view that companies will increasingly shy away from going public via the share market.

Why? There’s so much venture capital now that money is easy to find — but without the regulatory burdens that come via the share market.

It’s already happening. There are half the number of US stocks now than there were 20 years ago.

The cryptocosm will explode

It’s not something to worry about today.

But it’s some validation for one of the longer themes I’m tracking: The decline of the share market as crypto eats into every asset class the world over.

Futurist George Gilder calls for this ‘cryptocosm’ to lead to an explosion in business ideas, wealth creation and abundant investment opportunities.

I couldn’t agree more. It’s bound to be as transformative as the arrival of the internet.

But you have to be ready to be in it for the long haul. It’s not going to tell us what to buy today.

And what should we do on that front? I still like the small-cap end of the market.

My latest recommendation is currently up about 40% since it went out last month. We’ll see how it tracks from here.

More immediately, my colleague Ryan also has some ideas on who benefits as the big banks get hit from all sides.

If you’re looking some speculative ideas in this market, make sure you give it some consideration by going here.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch