When in a Hole, Stop Digging. But When in a Bubble, Keep Blowing

When in a Hole, Stop Digging. But When in a Bubble, Keep Blowing

Are the markets a bubble or Ponzi? 

The weakness of all bubbles, Ponzi or otherwise, is that all it takes is a rumour that it might be time to get out or that someone ‘in the know’ wants out, and a Ponzi scheme will pop like a soap bubble.

With low interest rates for too many years, markets have been distorted by companies borrowing cheap money and using the proceeds to buy-back shares. A recent example is Caterpillar who have had 28 months of consecutive falling sales but the share price is at near record highs. Last year they launched a $2B debt bond, some over 50 years, to buy-back shares to not only support the share price but the share price linked remuneration packages of the Executives as well.

Increasingly share valuations are not based on fundamentals and companies are not reinvesting in capital expenditure which will have serious future consequences.

So….what happens when the endless supply of credit, back stopped by QE and low interest rates, stops?

Zerohedge.com

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