"In a storm, hold up a 1 iron, not even the Lord can hit one of those "Lee Trevino

One just has to look at the headlines from Tuesday’s Financial Times to get a sense of the current strength of asset prices along with sentiment across a broad spectrum, and perhaps think it’s time for equity prices to take a breather. On Monday the latest release of Germany’s Sensex index, based on a survey of 1000 fund managers, reaches a ten year high. Broadcom offers $130 billion for QUALCOMM, the largest technology deal in history. The bulk of the offer is in cash and experts believe there will be enough appetite to finance this deal. The Hang Seng index hits a ten year high as Tencent gains. Rallies in iron ore and steel helped commodity stocks hit a three year high. The continued climb in the oil price, which some are now forecasting to get to $70 a barrel, has led to junk energy bond prices reaching a 7-month high.  Not so long ago the demand for oil was considered ever decreasing and some thought it would never get back above $40 again. Another record high for the NASDAQ, Dow Jones and the S&P 500, likewise MSCI All World Index continues to climb higher.

Tax reforms continue to dominate the headlines, with the possibility that companies with a lot of assets held abroad will be able to repatriate this capital without incurring the penalties that they now would. Apple is one of the best examples as the company holds 93% of its 250 billion dollars of cash and marketable securities overseas. Overnight Apple announced it was raising 7billion dollars of debt, at various maturities ahead of the possible tax reforms. CreditSights, in recent report questions the possible implications for capital markets, the tax reforms may have if companies will have the ability to repatriate capital to the credit markets. Will it offer more security to lenders and improve credit quality reduce default risk and broadening funding alternatives? On the other hand, it could open a wide range of assets to target for excessive borrowing in leveraging transactions.

Its an interesting debate, bull markets come to an end when central banks look to curb excessive leverage. Something they are so far not trying to do in any meaningful way. 2007 is the best example of what can happen when leverage becomes excessive in the extreme. Could the possible tax reforms, which are expected to provide the next leg of economic growth, provide the next systemic risk to capital markets? Looking back over history its often the case, events that create economic growth end up creating the next crisis. If one looks back over the previous industrial revolutions, steel, electricity and the internet. It is known as the law of unintended consequences.

Posted on November 7, 2017 .