The global bond market is larger than the global stock market. The estimated total worth of all bonds is more than USD 100 trillion, while global stocks add up to around USD 64 trillion. The global bond market has TRIPLED over the last 15 years! The U.S. alone accounts for 40% of the global bond market. That’s USD 40 trillion in U.S. bonds versus a USD 20 trillion U.S. stock market.
As investors, we have to pay attention to bond markets because what happens there affects stocks too. When bond yields fall, stocks are more attractive by comparison. The opposite is also true.
Corporate bonds make up about USD 9 trillion of the U.S. bond market. That’s nearly 25% of the overall market. That’s a lot of debt, about half what the entire U.S. stock market is worth. Thanks to recent Federal Reserve interest rate hikes, the mainstream media is suddenly paying attention to the corporate credit bubble. This discussion has just started.
How big of a problem is corporate debt in the U.S.? A thread!
Just looking at a few examples shows you how pretty big it actually is:
1. Toys R Us got itself neck-deep in debt. Then it had a weak period of sales and went bankrupt.
2. J.C. Penney has USD 4 billion in debt and weak sales and it looks to follow Toys R Us. Shares are trading at USD 1, giving it a valuation of just USD 345 million.
3. General Electric has an astounding USD 114 billion in debt and is selling off valuable parts of its business to stay afloat. Shares of GE are trading around USD 7.50, down from around $31 in summer of 2016.
The Fed’s interest rate hikes have been small but have contributed to the disaster. Companies are beginning to struggle with debt, even though rates are still well below normal levels. All this debt means an economic slowdown could push a lot of companies over the edge.
Times of free money is officially over. For many years now, companies have been rewarded for taking on more debt, buying back more shares and earning fat stock option bonuses thanks to share buybacks. This nonsense will peak soon. But many companies still prefer the idea of buying more shares back rather than paying off debt.
Conclusion: Don’t own companies with too much debt in this market. If they’re highly leveraged, they’re inherently fragile. And if companies spend most of their earnings on buybacks, I would avoid those too. Companies with lots of cash sitting around and no debt, however, could do very well. They may be able to acquire some bargain-priced assets if credit conditions keep tightening.
Look at Google and Apple: Google is holding USD 100 billion and Apple USD 237 billion in cash. They’re simply waiting for the markets to dive and give them bargains. This bold requires patience. But it could pay off in a big way for those who time things right.
As a bold and sophisticated investors you might copy a similar approach in this market. Wait for the bargains to come to you and have some cash sitting around for when they do.