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10 Market Bubbles Just Waiting to Pop


bostonangler
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Both the U.S. Federal Reserve and the European Central Bank are set to meet in the next two weeks. Fed Chairman Jerome Powell has already signaled a possible July rate cut.

But rate cuts have already been priced into equity markets, according to Wolfe Research’s Chris Senyek. He wrote in a note to clients Monday that another round of global easing would likely fuel existing asset bubbles and create new ones that could turn a “run-of-the-mill recession into a full-blown financial crisis.”

“From a long-term perspective, there are clear signs that debt levels are overextended,” he wrote. “We’re most concerned about 10 asset bubbles. The question is when these imbalances will unwind.”

Senyek noted that in the past 30 years, central bankers have tended to leave interest rates too low for too long. That builds more asset bubbles, which become undone when either inflation rises or bankers hike rates.

Here are some of the asset bubbles that Senyek is watching.

1. U.S. Government Debt. “One of the biggest bubbles in the current cycle resides in the U.S. treasury market with U.S. federal debt levels at post-war highs, despite the U.S. economy being almost ten years into an economic recovery,” Senyek wrote.

2. U.S. Corporate Debt. Senyek noted that nonfinancial business debt is growing steadily as a percentage of GDP, with nonfinancial corporate debt hitting record highs. That’s fueled mergers & acquisitions and corporate buybacks this cycle. The solid economy and low interest rates has also made some weaker credits look stronger than they are. “The next significant slowdown has the potential to create a downgrade cycle that turns an ordinary recession into a full-blown crisis,” he wrote.

3. U.S. Leveraged Loans. Senyek is also worried about trends in the leveraged loan segment of the corporate debt market. Companies have more debt, the loans themselves have fewer protections for investors, and measures of corporate profitability have been watered down. Not good.

4. European Debt. European bonds with negative yields are “perhaps the largest bubble currently,” Senyek writes. “Over the past few months rising expectations for additional ECB monetary stimulus has put downward pressure on both European sovereign and IG/HY yields.”

5. Bank of Japan Balance Sheet and Related Equity Holdings. During several rounds of quantitative easing, the Bank of Japan’s balance sheet assets have grown to about 100% of GDP, Senyek writes, and now includes stocks and exchange-traded funds. “We also believe that the BOJ is a top 10 shareholder in roughly half of the companies listed on the Tokyo stock exchange,” he wrote. “Our sense is that the BOJ’s ETF purchases have helped to artificially support Japan’s equity markets, potentially making overall losses much more severe whenever the next downturn hits.”

6. Unprofitable IPOs. The percentage of IPOs with negative earnings has passed the peak of the 90s tech bubble, which Senyek called a sign of frothiness in the market. He noted that the overall number of IPOs is below the 90s peak, “suggesting this level of speculative activity has further room to run.” He pointed to large IPOs, like Uber Technologies (UBER) and Lyft (LYFT), with huge valuations and no earnings.

7. Cryptocurrencies and Cannabis. Senyek said he sees “little inherent value in cryptocurrencies. Bitcoin’s rise to its peak at $18,674 in 2017 was “one of earlier signs that frothiness was spreading beyond the bond market,”” he wrote. “It’s been on the rise recently perhaps due to rising expectations of central bank liquidity.”

But as bitcoin was peaking, he noted, pot stocks like Aurora Cannabis (ACB) and Canopy Growth (CGC) began to take off. “While these stocks have traded sideways recently, we are closely monitoring this group as a sign for additional market speculative activity,” he wrote.

8. Growth and Momentum Stocks. Growth and momentum stocks have seen bubblelike characteristics, too. Beyond the so-called FAANG stocks— Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google’s parent Alphabet (GOOGL)—Senyek writes, “non- technology stocks with high momentum, MarketAxess (financials) and Ball Corp (materials), have witnessed material multiple expansion over the past twelve months beyond fundamentals, in our view.”

9. Software and Cloud Stocks. Since 2018, software as a service and cloud computing stocks have seen “significant multiple expansion,” Senyek writes. “The median P/E of software stocks relative to the market’s median P/E is currently at a 29-point spread (and this doesn’t account for non-GAAP add backs in software companies’ earnings).”

10. Exchange-Traded Funds. Passive investment strategies have been fueled by central bank liquidity suppressing volatility, Senyek writes. The rise of ETFs, especially, could add to problems in the next market downturn, according to Senyek. “We are most concerned about many fixed income ETFs invested in securities that have significantly less liquidity than the vehicles that own them.”

https://www.barrons.com/articles/10-market-bubbles-just-waiting-to-pop-51563874202?siteid=yhoof2&yptr=yahoo

 

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Thanks for this post BA.  There will be a correction to clean up the excesses much like a person who has run up his credit card. There will be a day of reckoning and a smart person will be prepared.  Pay off your loans, credit cards, don’t have all your money in the stock market, buy gold and silver, have some cash on hand, and be ready to take advantage of opportunities that may arise from another recession.  

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