Today, without a doubt, a massive bubble is forming in corporate debt.
And one recent example tells the story perfectly…
In June 2018, AT&T acquired Time Warner after a two-year fight to gain government approval.
As with most big mergers, AT&T borrowed a bunch money to do the deal.
And the combined company now has a staggering $180 billion of debt… making it the most indebted, non-financial company in history.
Most countries don’t carry that much debt, much less companies that sell us cell phones and cable.
In total, there’s more corporate debt in the world today than ever before. Ccorporate debt to Gross Domestic Product in the US is near an all-time high of around 72%.
And there’s so much debt because of low rates and easy money. All of the cash needs to go somewhere. And people today are willing to pay more and more for the same amount of earnings.
So share prices continue going up even though fundamentals are deteriorating.
Meanwhile, most executives are incentivized to inflate their share price.
So they’re loading up on debt to buy back stock at record high prices or to buy companies at record high prices.
But it’s a horrible investment today. And they’re harming shareholders by burning their cash on outrageously expensive assets.
To give you an idea of how indebted the average US company is today…
More than 20% of the companies in the Russell 2000 index and nearly 10% of S&P 500 companies need to borrow money just to pay interest on their debts.
These companies have to borrow money just to pay interest on the money they’ve already borrowed…
How is it possible that people continue lending these companies money?
People will look back and ask how this made any sense… how people could be so stupid.