Citi credit strategist Matt King doesn’t think the market is experiencing its “Wile E. Coyote” moment yet, but he does think that one will come eventually, and he thinks the market is on borrowed time.
Basically he thinks that the market’s gains are mostly a function of central bank looseness, and not a function of fundamentals, and that at some point the central bank story will change and markets will tank.
So why does he think the market isn’t based on fundamentals?
In his latest note to clients, he presents these two charts, which we explain below.
The one on the left shows credit spreads (light blue line) relative to corporate leverage (dark blue). As you can see, credit spreads remain extremely low (meaning corporations don’t have to pay much more to borrow than the risk-free rate at which the US government borrows at) while corporate leverage is climbing. This, King worries, is in contravention of historical patterns, and evidence of an economy on borrowed time.
The left chart relates to the stock market and it shows that even though earnings revisions (dark blue) have been generally negative for the last few years, stocks have done quite nicely. Again, to King this represents a break from fundamentals, and he notes that the break in equity market fundamentals coincides with the break in credit fundamentals.
So eventually, King argues, when the music stops playing and central banks do tighten, we will have our Wile E. Coyote moment.
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