Tik-Tok… Beware of a Bond Bomb

Tik-Tok… Beware of a Bond Bomb by Marin Katusa for International Man

A bull market can make an average or even rookie investor feel smarter than a Wall Street or Bay Street vet.

First time investors are throwing darts at a board blindfolded and coming up with big winners.

They’re putting their “Stimmy’s” (stimulus checks) to work in Robinhood—getting free stock for signing up and watching their “stonks” rise.

The thrill of big gains in stocks is juicing the loins of a whole new generation of traders and investors.

If TikTok is any indicator…

There has been an explosive growth in accounts picking stocks and predicting which will rise.

A couple even went viral with a video showing a “sure-fire” way to make money:

“Here’s my strategy in a nutshell: I see a stock going up and I buy it and I just watch it until it stops going up and then I sell it. And I do that over and over and it pays for our old lifestyle.”

More evidence of how the hype from these TikTok investors is influencing the markets can be seen in how small caps have been performing relative to the rest of the market in the last three months:

small caps

Big wins on penny stocks are the dream for any wannabe investor.

And that surge of interest and capital has led to irrational exuberance in buying small cap junior companies.

If it was that easy, you probably wouldn’t be reading this right now.

The Wall of Worry…

One of the key concerns for me that I believe could be a catalyst for a market correction is in the bond market.

Over the next 5 years, a significant portion of the lowest investment grade rated bonds (Triple B) along with the High Yield or “Junk” bonds (bonds rated below Triple B) will mature.

Companies will have to either repay the capital, or issue new debt to replace the existing debt.

The only way this will be mitigated is if the U.S. Federal Reserve continues to expand its asset purchase program. It may have no other choice but to do so.

That’s what Japan has done over the last 15 years.

It’s also what we’ve seen happen in the natural resource industry. I’ve previously talked about “Extend & Pretend”, first in the oil patch, and later on in the gold mining sector…

I called exactly what happened to the oil companies. Where the worst ones went bankrupt but most managed to delay by refinancing their debt.

If we expect that to be the case again here…

We will have short windows of volatility and sharp corrections until the Fed moves quickly enough to backstop the bond market.

Then our game plan will be to do exactly what we did in March 2020, which played out exceptionally well for me and my subscribers.

However, this time, I promise to try not to be too cheap!

Bond Whispers

The Russell 3000 Index is an index composed of the 3,000 largest publicly listed U.S. companies.

It is one of the most all-encompassing indexes and it includes companies with trillion-dollar market caps all the way down to $200 million market caps.

This provides a solid barometer of the required refinancing of corporate debt in the U.S.

Below is a chart which shows total debt by maturity year for companies in the Russell 3000 Index. There is a wall of debt maturing in the next few years.

And here we can see the High Yield debt maturing in the coming years…

The combined corporate “debt wall” could be a catalyst for a future major market correction.

You can see that the previous years shaded in grey are half the size of the upcoming maturities.

Where it gets interesting is that on average, companies in the Russell 3000 today have far more debt relative to earnings than in past history.

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