Asset Prices Are Climbing As Debt Soars

[Parsad]

Will we be ready when the music stops?

 

https://www.barrons.com/articles/asset-prices-are-climbing-as-debt-soars-will-we-be-ready-when-the-music-stops-51641311454?siteid=yhoof2

 

Cheers!

[Gregmal]

More money has been lost preparing for the crash than has been lost in crashes...or so I've heard. All I know is that I heard people making these same arguments back in 2011, and on and off they've been reiterated pretty much every year since then. Sometimes they have slightly different framing, but its always the same stuff. Would I own much tech? Not a chance in hell. 

 

The frameworks of this dudes case here is GFC 2008. Very rarely does the next crisis mimic the last one. It is generally something new that folks haven't prepared for. Such as...maybe inflation not being transitory?....In which case debt levels won't be the problem. 

 

Sometimes it pays to think outside the box. I stopped subscribing to Barrons some time ago because of the proliferation of articles like these. Bit more professionally crafted than Motley Fool, but still somewhere on par with Seeking Alpha or VIC, neither if which I find crazy enlightening. 

 

[Libs]

Thank God for Buffett and Munger.....who would never pass on an opportunity because of a macro fear. I would be broke if I hadn't instilled that philosophy years ago. 

[rkbabang]

8 minutes ago, Gregmal said:

I heard people making these same arguments back in 2011

 

 

There will be a market correction someday, so every day that passes is a day closer to the day that they will be right.  I'd rather make double digit returns for a decade then suffer a 50% correction with some cash on hand for buying opportunities. Rather than spend a decade waiting for the crash.  After the crash comes we will spend the next 5-10 years seeing articles about the guy that "predicted" the 202x crash. Oh well, nothing ever changes.  Bears will be bears.  

 

 

[Castanza]

I agree with the above sentiment but it does seem like there is growing speculation. Even on this forum there has been a rash of threads discussing speculative/riskier positions. Feels a bit like a race to the top. A good balance imo is staying invested but say instead of being 90/10, move to 80/20 or 75/25 by raising more cash. Barely hurts your upside while giving you some fire sale cash if we get a pullback. 

 

 

[Xerxes]

Agreed with the comment that the next one will rarely looks the same. Think of all the TV commentary, majority of which saw mid-March/April 2020 as the first leg (Ala Lehman Oct 2008) with the real bottom in March 2009. Or all the value investors that sat on their hands because it needs to play out like the dot.com right away in 2020. As oppose to see it as a 1987 like drawdown. To her credit, Kathie was one of the ones that made the bold case for the latter. 
 

I always tell my friend, just like in the morning you would never know that you will have a bad car accident that day, you are not going to see the drawdown come in and that we had only three since the mid-1980s. =>. 1987, 2008 and 2020. 
 

I don’t not include Dot.com since in my book it was the market rolling over 2 years. Just one big bear market and not a drawdown that takes everything down (including the kitchen sink)

Edited January 5, 2022 by Xerxes

[ICUMD]

The 2008 Lehman moment seemed to be aborted by central bank intervention and bailouts.

 

I doubt the central bankers will let the house of cards fall. They are not afraid to raise liquidity.   Any wobble,  and bam...  lower interest rates IMO + bailouts.

 

I try to keep powder dry for the wobble. 

 

 

[Gregmal]

There is also just a total bullshit narrative sold by financial professionals that we need to have a "crash". Collapse is also a popular word. It is just as likely, if not moreso that we just have an extended period of shit returns or gradual grind down of companies that didnt deserve to be where they were in the first place. 

[TwoCitiesCapital]

1 hour ago, Gregmal said:

There is also just a total bullshit narrative sold by financial professionals that we need to have a "crash". Collapse is also a popular word. It is just as likely, if not moreso that we just have an extended period of shit returns or gradual grind down of companies that didnt deserve to be where they were in the first place. 

 

I'd like to think this is actually possible, but it doesn't seem supported by historical market action. Always seems to be up-and-away and then crash-and-burn as opposed to treading water for 5-7 years. 

 

Too much margin/leverage/momentum positioning to just flatline for years IMO - particularly if I'm wrong and interest rates are rising in a sustainable basis. 

[Gregmal]

I agree with you in regard to crappy momo stocks. But real businesses that just get "pricey? I think in the later case you just run into problems with multiple expansion being tapped out. Whereas with the former you basically start a death cycle. Stock goes up just cuz. People buy those stocks just cuz. Those companies attract top talent who are kosher being paid in stock, just cuz. Then once that unwinds, its all over. Stuff like SPCE and PLTR come to mind. Versus an AAPL, AMZN, etc who might just need some cooling off period. 

 

Which I guess just leads back to the problem of referring to "the market" as if its one thing. As Jim Cramer says, 100% accurately, there's always a bull market somewhere. I feel fairly certain that the bull market WILL NOT be in tech stocks this year. But I do like "the market" if we're talking housing, banks or energy for instance. Its all relative. 

 

The interesting thing in all of it is what is safe. Whats always been safe isnt safe anymore IMO, which puts folks in an interesting situation. 

[Guest]

Hasn't this been happening for the past 40 years?

[Xerxes]

Here is an analogy when it comes to making forecast:

 

Walt Disney in 2012 bought Lucasfilm. But the rights of the original six movies would remain with Fox until 2020, while Walt Disney owned future releases etc. Weirdly enough, Fox actually had perpetual ownership of Episode 4. So you could imagine that in 2012, there were a whole host of Hollywood / Wall Street analysts opining on these details, that how Fox would probably retain is perpetual ownership of Episode 4 etc after 2020.

 

Of course the one thing no one see coming was that Walt Disney bought Fox, and that the Murdoch family became one of the largest Walt Disney shareholders.

 

I think the same thing applies to everything. People do macro forecast all the time, but there is always something much bigger outside one's sandbox that re-shapes, but really is un-forecastable.

[Gregmal]

Exactly. Models and detailed forecasting is largely a Wall Street created product phenomenon drummed up as important because frankly, how else to you justify paying a bunch of risk averse math nerds six figures? When investing in real life, focusing on qualitative is SOOOOO much more important than quantitative. Which isnt to say quantitative doesnt matter, but it just matters a lot less than most think.

 

Up until the recent tax shield thesis on sports teams, it always made me laugh how uncomfortable the "traditional" investment community got when discussing things like sports teams and art. They just didnt get it. Still probably dont. Same sort of quality, scarcity, irreplaceableness applies to businesses. Focus on owning the best ones, and look for the market to occasionally serve up a decent entry to what is considered "the norm". Which if the norm for the past decade or two is is 30x, then the discount may be 25x. Deal with it or dont invest. The market and the millions of participants out there dont give a fuck that YOU think 25x is too rich and it should be 15x. 

 

Today, with money so freely available, theres more and more competition for great assets. It makes perfect sense. I dont see that ending because theres too much dry powder out there to jump in when someone gets bumped out. Remember all the PE firms who created their "distressed RE opportunity fund" entities during April and May of 2020? Yea, so much for that. Theyre now the ones paying 3 and 4 cap rates. So much for distressed. Unless you are predicting some 1 in a 100 year event sitting around fearing these things is a losers game. And well, even a lot of times if you predict the 100 year event, its still a losers game. 

[no_free_lunch]

18 hours ago, Gregmal said:

There is also just a total bullshit narrative sold by financial professionals that we need to have a "crash". Collapse is also a popular word. It is just as likely, if not moreso that we just have an extended period of shit returns or gradual grind down of companies that didnt deserve to be where they were in the first place. 

Agree that with government  intervention this is how it may go, a flat lined market for years. Is this not what has been happening all over the world for the past 15 years?  It's just the states and a handful of countries that are meaningfully up since the 2007 peak.

[wabuffo]

I was looking at a company that had total borrowings of $2.5B at the end of 1999 -- but those borrowings had ballooned astronomically to $116.9b by the end of 2020!

 

That's 47x !!! 

 

What's even worse, it that this company has other contractual commitments that are even larger than its long-term debt!  And those have been growing exponentially as well. 

 

When will the music stop for this highly leveraged company?   Gotta be soon, right?  Should be an easy short!

 

The name of this company?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Berkshire Hathaway!

 

An example of the unintended irony of this thread's title.

 

Bill

Edited January 6, 2022 by wabuffo

[wabuffo]

Let's check in on US household debt to US GDP.... near decade's lows.... good, good.   Even when GDP contracted at Depression-levels temporarily during the start of the pandemic....

 

 

Of course, US household debt is growing (cue scary music....)

 

 

Bill

Edited January 6, 2022 by wabuffo

[ERICOPOLY]

30 minutes ago, wabuffo said:

I was looking at a company that had total borrowings of $2.5B at the end of 1999 -- but those borrowings had ballooned astronomically to $116.9b by the end of 2020!

 

That's 47x !!! 

 

What's even worse, it that this company has other contractual commitments that are even larger than its long-term debt!  And those have been growing exponentially as well. 

 

When will the music stop for this highly leveraged company?   Gotta be soon, right?  Should be an easy short!

 

The name of this company?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Berkshire Hathaway!

 

An example of the unintended irony of this thread's title.

 

Bill

Apple's debt ballooned from $300m in 1999 to $136B today.  

[Gregmal]

So whats the issue? Is it troubling that in a vacuum they have more debt, or is it wise that they used the debt to buy quality assets that have proven to become more valuable than the cash they borrowed?

 

Ive always thought the "oooh too much debt" concerns were very first level thinking.

[backtothebeach]

45 minutes ago, wabuffo said:

I was looking at a company that had total borrowings of $2.5B at the end of 1999 -- but those borrowings had ballooned astronomically to $116.9b by the end of 2020!

 

That's 47x !!! 

 

What's even worse, it that this company has other contractual commitments that are even larger than its long-term debt!  And those have been growing exponentially as well. 

 

When will the music stop for this highly leveraged company?   Gotta be soon, right?  Should be an easy short!

 

The name of this company?

[...]

 

 

LOL, you totally got me there. Great post about how easy it is to make a totally wrong point with a hand picked stat.

[Cigarbutt]

11 hours ago, wabuffo said:

Let's check in on US household debt to US GDP.... near decade's lows.... good, good.   Even when GDP contracted at Depression-levels temporarily during the start of the pandemic....

 

 

Of course, US household debt is growing (cue scary music....)

Bill

Can i provide additional perspective?

(a QE

i remember discussing this aspect here (a QE thread, around 2018) with a poster who had suggested that it was expected that the green line would compensate for the red line after the GFC. At the time, i was wondering if there was excessive compensation and now..

Anyways, if the theory applies that the green line moving from 55% to 40% around the dot-com period "caused" a recession, i wonder what it would take this time.

When i trained, this concept was called habituation and in the macro debt world, i've learned that some people call this marginal revenue product of debt. Some even say that sometimes one tends to get less and less bang for the buck.

 

[wabuffo]

CB - thanks for that chart.  I am always happy that you are one of the posters here who loves macro stuff almost as much as I do.

 

A few observations (I could be repeating myself here, so sorry in advance for that).

 

- US Treasury debt is really just US Treasury securities held by the public sector (I don't really consider this debt - any more than currency in circulation or bank reserves are debt.  They are just one of three forms of private sector assets created by US Treasury deficit spending).   If not for the debt ceiling + the TGA balance not allowed to go negative, the US Treasury doesn't have to issue US Treasury securities at all.  As we've seen in a weird monetary plumbing experiment in 2021 (where the TGA balance started at $1.8t and ended the year near $100b), when the US Treasury does not issue securities to remove the reserves that its spending creates, reserves flood the system and rates start to fall.  The only thing that prevented them from going negative in the second half of 2021 was the Fed stepping in and lending from its inventory of US Treasury securities (via reverse repo) to provide the US Treasury securities that the private sector needed.

 

- starting in 1998 and lasting until mid-2002, the US Treasury went into a multi-year surplus (ie more Federal taxes going in than Federal spending going out).  As you've heard me say often - "for the public sector (ie Fed govt) to run a surplus, the private sector needs to run a deficit (ie borrow to maintain its consumption).   So it's not a coincidence, that the drop in US Treasury securities during this period triggered a large increase in private sector (mainly household borrowing via the mortgage market).  In fact, the domestic private sector (US households) competes with the foreign sector's desire to net save US dollar and US dollar assets via the trade deficit.  So in addition to the US Federal govt not providing enough of a deficit (and running a surplus instead), the admission of China into the WTO in 2001 really expanded the US trade deficit and combined with the US Federal surplus squeezed the US household sector really, really hard.  Obviously, this trend has completely reversed now with large Federal deficits, smaller trade deficits equaling....surprise, surprise... astronomical levels of household savings and rock-solid balance sheets (in terms of debt) vs the early aughts.

 

- I view business debt as a proxy for business investment and this brings in another axiom I'm fond of -- private sector (business) investment equals private sector (household) savings.  Of course this is with a closed economy and no federal govt.  If the household sector wants to save more than the business sector wants to invest, then household income falls until balance is achieved.  This is where the Federal govt comes in.  The new equation becomes: business investment + govt deficit = household savings. 

 

My contrarian view (despite the recent doom-mongering in the business press) is that the failure of Biden's BBB spending & taxing agenda plus a potential Republican sweep in next year's midterms would push the US Congress to the sidelines.  The large deficit spending is rapidly declining to more reasonable levels (Federal tax receipts are booming! while some spending programs are falling off as one-timers end) and we get to retain all the benefits of the very stimulative-to-investment Trump tax cuts (low tax Federal corporate tax rates, accelerated depreciation, etc).   Growth could really boom here for the next few years once the pandemic stuff recedes.

 

Just my 2-cents and I could be wrong.

 

Bill

Edited January 7, 2022 by wabuffo

[Cigarbutt]

9 hours ago, wabuffo said:

...

Just my 2-cents...

Bill

Yes macro stuff is almost always a waste of time unless one finds the topic interesting.

An aspect that often comes up in 'discussions' is that people use a multi-variable equation (which has a sound basis) and then hold everything constant except their own 'proprietary' explanation.

Speaking of a potential limitation in one of your conclusions is that there seems to be an assumption that investments and savings remain constant over time which, obviously, does not apply. Maybe it's old school but future profitability tends to be correlated to previous productive investments (funded by capital and/or debt). For example, in the US, during the period leading up to the late 1800s, there was a significant trade deficit (mostly from finished products) but this deficit was used to build future productive earning power. The US even became a surplus nation for quite a while after. Maybe these things come in cycles too.

 

Note: did you really mean "smaller trade deficits"?