A Carnival cruise ship arriving in Marseille. Cheap money raised in the bond market has helped cruise lines, including Carnival, stay afloat.
Gerard Bottino/SOPA Images/LightRocket via Getty Images
Money never has been this easy, companies are taking advantage by raising cheap capital, and the Dow Jones Industrial Average ended the week at a record. What else is there to know?
The stock and bond markets apparently have come to terms with the likelihood that the Federal Reserve will make its long-awaited announcement about slowing its massive securities purchases as soon as next month. And although central bank officials take pains to explain that reduced bond buying doesn’t equate to tightening through interest-rate increases, the Treasury and short-term rate futures markets have priced in two quarter-point boosts in the key federal-funds rate target by the end of 2022, from the current rock-bottom 0%-0.25% range.
For now, however, monetary conditions are the easiest ever, according to Strategas’ Thomas Tzitzouris. His calculations are based on the ultralow real 10-year yield from Treasury inflation-protected securities, or TIPS—negative 0.95%—and the high implied expected inflation of 2.62% (derived from the difference between the yields on the 10-year and the corresponding TIPS). That’s consistent with other measures of loose conditions from Goldman Sachs and the St. Louis Fed, which would “indicate that things have seldom, if ever, been this good,” he writes in a client note.
All that cheap money is being put to work, if not always wisely. ProShares Bitcoin Strategy (ticker: BITO) this past week became the first Bitcoin-futures-based exchange-traded fund out of the gate. That helped push the underlying cryptocurrency to a record on Wednesday, before it pulled back by week’s end.
Cash that special-purpose acquisition companies raised earlier also is being put to work. WeWork (WE), which failed spectacularly when it planned an initial public offering a couple of years ago, merged with SPAC BowX Acquisition, for a market cap of $9.5 billion, or about a fifth of the anticipated value of the aborted IPO. And recalling the frenzy in meme stocks early this year, Digital World Acquisition (DWAC) jumped over 800% after the SPAC said it would merge with Trump Media & Technology Group.
But, as usual, the big money came from the bond market, where a borrower’s paradise prevails, to lift the term coined by Mark Grant, chief global strategist for fixed income at B. Riley Securities. Over $50 billion was raised in the investment-grade corporate market on advantageous terms for issuers in the past week, notes Cliff Noreen, MassMutual’s Global Investment Strategy chief.
Topping the week’s calendar was a massive $21 billion offering from AERcap Holdings (AER) to help fund the Dublin-based company’s acquisition of General Electric ’s (GE) aircraft-leasing business. Cruise line Carnival (CCL) also was back to tap the high-yield market for a private deal to refinance more of the debt it took on to keep it afloat during the pandemic. By providing gushers of liquidity to the financial market, the Fed has been a big help to the Covid-affected airline and cruise industries, Noreen commented.
The stock market also appeared buoyed by reports of fading prospects for tax increases, as negotiations among congressional Democrats over the Build Back Better measure drag on. Sen. Kyrsten Sinema (D., Ariz.) reportedly won’t go along with any tax hikes on corporations, capital gains, and the top marginal rate for individuals, as proposed by the House version of the legislation. Given that the bill’s cost now could sink significantly below $2 trillion, writes Goldman Sachs’ Alec Phillips, changing some aspects of corporate tax law could raise enough money to fund it, without hiking the statutory rate, currently 21%, to 26.5%, as the House had sought.
But the less pleasant aspect of easy money is the inflation that is likely to persist longer than what Fed officials have been predicting. And it’s not just because of the well-publicized supply-chain snafus or rising housing costs.
Read more Up and Down Wall Street:Is Stagflation Coming Back? Economist Sees Parallels With the 1970s—and Big Differences.
Home prices are up a record 19.5% in the past year, according to Case-Shiller data, writes Joseph Carson, former chief economist at AllianceBernstein, in his blog. However, they were removed from the official price indexes owing to political and statistical issues. If they were still included, inflation would be running at a 10% clip, rivaling the 1980s, he adds.
Eliminating this inflation could require wrenching interest-rate hikes down the road, with unavoidably adverse effects on the economy, Carson concludes. So, enjoy the easy money while it lasts.
Write to Randall W. Forsyth at [email protected]
