A Vaccine Won’t Cure The 20-Year “Widow-Maker” Trade

Vaccine Cure Widow-Maker, A Vaccine Won’t Cure The 20-Year “Widow-Maker” Trade

The Debt Problem

The most significant problem for the majority of companies in the “value” space is debt. As we have discussed previously, in just the last 10 years, the triple-B bond market has exploded from $686 billion to $2.5 trillion—an all-time high.

“To put that in perspective, 50% of the investment-grade bond market now sits on the lowest rung of the quality ladder. 

And there’s a reason BBB-rated debt is so plentiful. Ultra-low interest rates have seduced companies to pile into the bond market and corporate debt has surged to heights not seen since the global financial crisis.” – John Mauldin

Vaccine Cure Widow-Maker, A Vaccine Won’t Cure The 20-Year “Widow-Maker” Trade

The debt issuance is problematic as companies used it for non-productive investments such as stock buybacks and dividend issuance as corporate profitability remained extraordinarily weak over the last decade. 

As discussed in “The Importance Of The Buffett Indicator,” corporate profits are at the same level as in 2009, while markets are at all-time highs. Exactly where is the “value?” 

Vaccine Cure Widow-Maker, A Vaccine Won’t Cure The 20-Year “Widow-Maker” Trade

Notably, corporate profits are a reflection of economic growth rates, and a “vaccine” will not cure the problem plaguing profitability long-term—the debt. 


Value Needs Strong Economic Growth & Higher Rates

The problem with the “vaccine will lead to a value rotation,” is such would require more robust economic growth and higher rates for increased profitability. 

  • Banks – need higher interest rates
  • Energy – needs higher oil prices 
  • Materials – needs more substantial economic growth driving physical investment.
  • Industrials – same as materials.

Here is where the “rotation to value” runs into problems. 

Let’s start with the banks.

If interest rates were to rise substantially, the economy contracts due to the economy’s massive debt levels. We showed this specifically in “The Fed Will Monetize All Debt Issuance..”

“In an economy laden with $75 Trillion in total debt, higher interest rates have an immediate impact on consumption, which is 70% of economic growth. The chart below shows this to be the case, which is the interest service on total credit market debt. (The chart assumes all debt is equivalent to the 10-year Treasury, which is not the case.)”

Vaccine Cure Widow-Maker, A Vaccine Won’t Cure The 20-Year “Widow-Maker” Trade

What about energy stocks?

No one believed me in 2017 when I stated that oil prices were going to remain low. 

“With respect to investors, the argument can be made that oil prices could remain range-bound for an extremely long period of time as witnessed in the 80’s and 90’s.

Energy companies still have a massive supply/demand imbalance that existed long before the “pandemic” hit the economy. While a vaccine may provide a short-term boost, the underlying fundamentals are still not supportive of a long-term rotation. 

Energy companies, along with basic materials and industrials, need stronger economic growth.

That isn’t coming.

Weaker Economic Growth

A vaccine will not solve the longer-term problems plaguing weaker economic growth rates and stronger fundamentals.

As we discussed previously in the “One-Way Trip Of American Debt,” the economic growth rate has been undermined by the surge in debt over the last decade.  

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