Exploding Debt Levels Will Kill the Stock Moon Launch

Mish

With Interest rates at zero and debt levels skyrocketing, it will be difficult for corporate profits and share prices to continue their push higher forever.

Exploding Debt Levels

It is impossible to know when something will matter but I agree with Peter Cecchini, founder and CEO of AlphaOmega Advisors who says Stocks Can't Go ‘To the Moon’ Forever.

“Some of the earnings estimates that I'm seeing, as you said, the consensus is just below $170, are going to require multiples that just don't make a lot of sense to me within the context of the fact that rates can't go any lower. So if we're looking for multiple expansion to continue to drive the rally, I don't think we're going to get that because the Fed’s efficacy is limited, right? It has firepower, no one's saying the Fed doesn't have ammunition. It can print money and it can go buy Treasuries for as long as it would like. But at the end of the day, when you're at zero, the stimulative impact is muted... I think that is one huge piece that people are missing. We're not just back to, you know, this `to the moon’ scenario for earnings. If anything, we're back to a situation where cashflows remain challenge and, by the way, debt levels have exploded.”

Click on the above link for a podcast.

And in case you missed it, please consider Do You Understand the Ramifications of Passive Investing?

Mish

Comments (60)
No. 1-18
Realist
Realist

Passive Investing? You mean like your gold and cash holdings? Or do you actively trade your positions?

Jackula
Jackula

With zero bound interest rates here comes UBI in the next crisis. Oh wait! We already started a crude form of it!

Casual_Observer
Casual_Observer

The Fed has been the largest buyer of debt. Money is in the form of electrons.

Casual_Observer
Casual_Observer

2021 will be rangebound.

FromBrussels
FromBrussels

Your friend Cramer won t agree Mish; with sleeves rolled up he ll shout : BUY BUY ! At one point this will mean bye bye to your money, the x trln questions being : how WHEN and why...As far as the why question is concerned your article does make sense though...

JonSellers
JonSellers

Just the opposite Mish. Exploding debt is what is sending stocks to the moon. Debt is on one side of the ledger, stock prices on the other.

Six000mileyear
Six000mileyear

The impression I get from reading financial media is much of the corporate debt incurred is not going to productive use; therefore, defaults will be massive. It's being used to pay executives for the options they've exercised and enrich other large sharholders while implicitly selling a poorly performing company to banks. Leveraged mergers make comparing pre and post merger earnings difficult and confusing, which offers a great way to hide poor performance with continuing to own/run a company.

anoop
anoop

Is this a bet against Yellen? Nobody bets against Yellen!

Eddie_T
Eddie_T

The Fed is out of ammo, right? That’s what the people who believe that fundamentals will matter one day keep saying.

That’s where they’re wrong, imho. The Fed is not out of ammo quite yet. At least I don’t think so.

The rock and hard place comes if and when when they finally have to raise rates to cool an overheated CPI. Then they have to make a choice between perpetually rising stocks and controlling inflation. As long as inflation stays tame, they get away with their manips.

At least that’s been the case for a decade. Why should 2021 be different?

I got out of stocks in 2009. It’s a completely rigged game, and winning depends on getting out ahead of the crowd when it finally tops and corrects...I’m sure maybe 5% of people with money in stocks will do that. The rest will ride the curve back down and look to blame the Fed for their losses.

Realist
Realist

Clearly, there are as many predictions about the future as there are individuals. Regarding investments, you can find numerous predictions that echo what you believe, if that makes you feel better. Personally, I would rather admit that I have no idea of what the future holds for my investments, and focus instead on diversifying as much as possible, in terms of assets, and geography.

Stocks, bonds, real estate, gold, farmland, private equity, cash, etc all have a place in my portfolio, precisely because I have no idea which will perform better at any given moment in time. Being well diversified and rebalancing frequently has worked for me throughout my entire life. I see no reason to gamble on what someone else thinks the future will hold, because there are an infinite number of predictions. Which one will be right? Often, none of them. Because the future is so unpredictable.

Will the stock market crash again (whatever your definition of crash is)? Of course it will, but no one knows when. Getting completely out of the stock market is foolish. Mish uses Japan as an example of why passively investing in the stock market doesn’t work. But the only thing that example shows, is why you want to diversify. Japan is one of many stock markets around the world. Looking back at the history of all stock markets, you will find many winners and losers. How would his argument look if he posted a US stock index instead. I’m afraid that Mish is guilty of finding an example to fit with the conclusion he wants to prove. (sounds like what Trump supporters keep doing)

Looking back at individual stocks, you can do the same thing. Should you avoid all stocks after you look at the chart of Kodak, Blockbuster, or Enron? Of course not. Should you post a chart from one of those companies and say it proves that you should not invest in stocks? I wouldn’t. That would be disingenuous.

Dodge Demon
Dodge Demon

Buy stock in Sherwin Williams to ride the wave of theatrical “vandalism” incidents against our brave Congress Crooks.

Poor Nancy and Mitch.
I’d be real curious if they make a claim against their homeowners insurance policies. Vandalism covered, riot and insurrection excluded. In any event, however, insurance fraud a crime.

tedr
tedr

And the sooner the better. P/E ratios have been insane and unstainable for years.

truthseeker
truthseeker

Oh my gosh Mish I just remembered this and hope you do also. Like more than 10 years ago my wife asked me why I spend so much time on your blog, messing around and so I said he understands economic issues better than anyone else I’ve found and though he’s a California liberal on social issues, he’s extremely honest with his comments a great virtue really hard to find these days no matter where you look. Anyway the topic must have been corporate America and the trade deficit or stock options because I said to my wife, “look at this Mish has this guy, a friend of his, an economist in Peking agreeing with me that American CEO’s are backdating stock options to the yearly date the stock was the highest which is a crime! Honest as you are you are, Mish, you informed me of this. Anyway if this is one of my weird stories I’m never offended by your decision to delete.

G Croce
G Croce

Collapsing debt levels will kill the stock moon launch.

LawrenceBird
LawrenceBird

None of that matters. All that matters is perception - people will continue to chase shares for as long as they believe that others will also do so.

oee
oee

the Doomsayers have calling for a stock market crash...since March 2009. there have been up and downs for the stock market since that date. The only down year was in 2018, because the Fed increased interest rates. However, as Keynes used to say, even a broken clock is right twice a day. the fall will come...but not a crash.


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