From Ruminations to Random Thoughts
Last post: Ruminations. Today: Random thoughts.
So rather than try to present some weekly summary, or theory about what happened in December, what's going on now, what's coming, just some thoughts that might provide a little light, something to chew on, something to wake you up, if you're one of those who think - reasonably by some measures - that the U.S. economy will continue grinding up, and the worst of December will turn right around into a resumption of the bull market, or even the so-called "Melt-Up" (see previous posts re this).
Random Thought #1
The Melt Up can't be easily dismissed, given the history of Melt-Ups marking the end of bull markets. But does that mean you need to participate, should it occur. Think about it this way: If stock prices jump and exceed previous highs and the chart of the S&P turns into a high pole (where prices just shoot straight up and stick out like a pole on a recent chart), should you be concerned that you'll miss it? No, unless you've got a fool-proof (or almost fool-proof) way to sell somewhere near the top, or at least reasonable near. Why? Because Melt-Ups occur right before things go seriously South, or worse, crash. If you don't have a fool-proof way to get out, then just stay out.
If you decide to stay out, make up your mind that your emotions won't get the better of you if indeed a Melt-Up occurs. Those who give in to their emotions and buy into the last stages of a Melt-Up will suffer the consequences - and it won't be pretty.
Random Thought #2
Something important to remember - or if you didn't know this to learn it now: It's not the case that a bear market in stocks or even a crash occurs as the result of a recession, or even as the result of serious economic weakness. So if you're in the camp of "the economy's doing well," no problem. Maybe it is. But that won't preclude a stock market turn down or even a melt DOWN.
Random Thought #3
This one goes beyond the stock market. It's got to do with debt. Corporate debt levels - in terms of dollar value - are higher than they were before the 2008 crisis. Not only are they at higher dollar values, but they're at a higher % of GDP than before the 2008 crisis. Corporations have borrowed trillions since 2008. Maybe it was strictly because interest rates were so low. But at some point that debt will have to be repaid or re-financed - at higher interest rates, rates having increased over the last year. Corporate debt as its highest level ever, whether measured in dollar value or % of GDP, should be seen as a good measure to predict an oncoming recession. It may not come tomorrow, or even this year, but it's coming. And with debt levels at their highest, it's not unreasonable to think that the consequences could be even worse than 2008.
More: 50% of investment grade corporate debt outstanding is BBB - just above junk. This is be far the highest % of corporate debt in the BBB category. Overall, debt covenants (agreements that govern debt repayments of principal and interest) are sketchy. Lawyers wrote in all sorts of shaky clauses that allow the issuers far more leg room than is prudent to delay or avoid paying interest or re-paying principal. Those who loaned this money are expecting interest payments and re-payment of principal. They bought what they thought were safe and reliable corporate bonds. But they're not as safe or reliable as one might assume.
The best way to think about this: Subprime debt was thought to be relatively safe and reliable before the last crisis. It wasn't and it triggered that crisis. Can we possibly imagine that current corporate debt, in light of the facts, might be a trigger of the next crisis?
Random thoughts? Sort of. Related? Yeah, I think so. Food for thought? You tell me.
So rather than try to present some weekly summary, or theory about what happened in December, what's going on now, what's coming, just some thoughts that might provide a little light, something to chew on, something to wake you up, if you're one of those who think - reasonably by some measures - that the U.S. economy will continue grinding up, and the worst of December will turn right around into a resumption of the bull market, or even the so-called "Melt-Up" (see previous posts re this).
Random Thought #1
The Melt Up can't be easily dismissed, given the history of Melt-Ups marking the end of bull markets. But does that mean you need to participate, should it occur. Think about it this way: If stock prices jump and exceed previous highs and the chart of the S&P turns into a high pole (where prices just shoot straight up and stick out like a pole on a recent chart), should you be concerned that you'll miss it? No, unless you've got a fool-proof (or almost fool-proof) way to sell somewhere near the top, or at least reasonable near. Why? Because Melt-Ups occur right before things go seriously South, or worse, crash. If you don't have a fool-proof way to get out, then just stay out.
If you decide to stay out, make up your mind that your emotions won't get the better of you if indeed a Melt-Up occurs. Those who give in to their emotions and buy into the last stages of a Melt-Up will suffer the consequences - and it won't be pretty.
Random Thought #2
Something important to remember - or if you didn't know this to learn it now: It's not the case that a bear market in stocks or even a crash occurs as the result of a recession, or even as the result of serious economic weakness. So if you're in the camp of "the economy's doing well," no problem. Maybe it is. But that won't preclude a stock market turn down or even a melt DOWN.
Random Thought #3
This one goes beyond the stock market. It's got to do with debt. Corporate debt levels - in terms of dollar value - are higher than they were before the 2008 crisis. Not only are they at higher dollar values, but they're at a higher % of GDP than before the 2008 crisis. Corporations have borrowed trillions since 2008. Maybe it was strictly because interest rates were so low. But at some point that debt will have to be repaid or re-financed - at higher interest rates, rates having increased over the last year. Corporate debt as its highest level ever, whether measured in dollar value or % of GDP, should be seen as a good measure to predict an oncoming recession. It may not come tomorrow, or even this year, but it's coming. And with debt levels at their highest, it's not unreasonable to think that the consequences could be even worse than 2008.
More: 50% of investment grade corporate debt outstanding is BBB - just above junk. This is be far the highest % of corporate debt in the BBB category. Overall, debt covenants (agreements that govern debt repayments of principal and interest) are sketchy. Lawyers wrote in all sorts of shaky clauses that allow the issuers far more leg room than is prudent to delay or avoid paying interest or re-paying principal. Those who loaned this money are expecting interest payments and re-payment of principal. They bought what they thought were safe and reliable corporate bonds. But they're not as safe or reliable as one might assume.
The best way to think about this: Subprime debt was thought to be relatively safe and reliable before the last crisis. It wasn't and it triggered that crisis. Can we possibly imagine that current corporate debt, in light of the facts, might be a trigger of the next crisis?
Random thoughts? Sort of. Related? Yeah, I think so. Food for thought? You tell me.
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