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Will the Asset Rally Ever End?

November 01, 2021
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In case you missed our post last week, we discussed the policies of the world’s central banks – specifically the inflation of asset prices worldwide. https://andorracapital.com/historical-ratio-divergence/ We don’t have perfect solutions to the world’s financial issues, but we certainly think there are better ways to approach the monetary system than relentlessly pouring trillions of dollars into asset markets like drunken sailors. Clearly this is not sustainable, but we have also repeatedly theorized that doom is not imminent. When you read the news there is plenty of bad news and we are still climbing the “wall of worry” in asset markets from bonds to stocks, commodities and real estate. Among the worries that are keeping buyers on the sidelines are the supply chain disruptions, potential tax law changes, the Chinese invading Taiwan, the Fed tapering their support of markets, new Covid regulations/outbreaks and may others. As long as people are still looking for reasons that asset market rallies will stop soon – we will probably continue to go higher.

When we start hearing about how great everything will be and there are no risks, that is when we need to start worrying about the end of market exuberance. We are certainly not there yet. To be clear, there is no precise calculation of when the bull market has run too far and it is time to sell. No one rings a bell at the top of a bull market and tells you to get out. We must do our best to read the tea leaves and estimate when it is time to reel in risk. Here is one indicator that is surprisingly positive and when more of this type of good news is made public, we need to assume that the information is priced into the market already. That indicator is the amount of corporate debt that America has amassed. Here is a historical chart of the amount of corporate debt outstanding as a percentage of the US Gross Domestic Product – or the best (although seriously flawed) guess that we have of the dollar figure of the U.S. economy.

Surprisingly, this is showing the amount of U.S. corporate debt in terms of percentage of the GDP screaming in back toward pre-Covid levels. This is really good news for the future of the U.S. economy. This is also quite a surprise considering the Covid-rattled economy that U.S. corporations are dealing with. Interest rates are historically low – very enticing for a company to issue more debt and yet corporations are bringing their leverage ratios back to where they were a couple years ago. Keep in mind that the Federal Reserve branch of St. Louis is only providing these numbers through the second quarter of this year – but the trend has continued even further through the third quarter. To be clear, the debt is still a big issue – but it is not the runaway profligacy that one might fear considering the situation (we cannot give the same props to the Federal Government, surprise surprise.)

So, there we have it. On a weekly post that consistently complains about the runaway debt numbers that are being rung up by individuals, corporations, and government entities, finally we have some good news. Let’s not let that get too far out of hand though – the debt numbers across the board are still ridiculous and getting worse. But this is obviously the first good news you have heard from us recently on the debt front. Ironically, the more good news you hear from us, the closer we are to the top of this amazing bull run in asset prices!

Regards and good investing,

Greyson Geiler