Explaining US Stock And Bond Markets In 5 Easy Charts
We’ve been saying for quite some time now that the US equity market’s seemingly inexorable (until this week) tendency to rise to new highs in the absence of the Fed’s guiding hand is almost certainly in large part attributable to the fact that in a world where you are literally guaranteed to lose money if you invest in safe haven assets such as negative-yielding German bunds, corporations can and will take advantage of the situation by issuing debt and using the proceeds to buy back stock, thus underwriting the rally in US equities. Here’s what we said after stocks turned in their best month in three years in February:
It also explains why, in the absence of the Fed, stocks continue to rise as if QE was still taking place: simply said, bondholders - starved for any yield in an increasingly NIRP world - have taken the place of the Federal Reserve, and are willing to throw any money at companies who promise even the tiniest of returns over Treasuries, oblivious if all the proceeds will be used immediately to buyback stock, thus pushing equity prices even higher, but benefiting not only shareholders but management teams who equity-linked compensation has likewise never been higher.
If you need further proof that this is precisely what is going on in US markets, consider the following from Citi:
Companies are rapidly re-leveraging…
...and the proceeds sure aren’t being invested in future productivity, but rather in buybacks and dividends…
...and Citi says all that debt issued by struggling oil producers may prove dangerous given that “default risk in the energy space has jumped [and considering] the energy sector now accounts for 18% of the market”...
...and ratings agencies are behind the curve…
...and finally, there’s quite a bit more junk out there than there was last year…
* * *
We'll leave you with the following:
To be sure, this theater of financial engineering - because stocks are not going up on any resemblance of fundamental reasons but simply due to expanding balance sheet leverage - will continue only until it can no longer continue.
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Sadly, even the growth in balance sheet leverage and stock buybacks can't justify stock price rises anymore. The sad simple explanation for the rise is due to TBTF banks and financial institutions plunging more and more cheap Federal Reserve funding into the market at the central banks direction thereby artificially raising prices and driving out investors. Sadly, rather than the Federal Reserve discouraging gambling and taking risk that endangers the financial market, they are encouraging TBTF banks to do the opposite and knows this puts citizens money at risk.
Sadly the central bank must think it benefits from ruining the economy since this is the way it gets more QE and power, which it seems to use to make more catastrophic collapses. We will see their work come to fruition in the next cataclysmic downturn they are fabricating now.