Blain’s Morning Porridge July 2nd 2025: Stocks and Bonds Hit Record Highs. Hard Hats On!
“Scotsmen are seldom mistaken for a ray of sunshine.”
When markets are hitting record highs is the time to be cautious, and ask why? US Stocks and Bonds are at record levels, despite the current uncertainties and policy instability. What’s driving it is a mix of themes, including market evolution. But also a market potentially complacent about approaching threats.
When markets are as frothy as they are, it should be no surprise all my BS alarms are buzzing! I finding myself wondering if I am just plain wrong about markets?
- US stocks hitting new record highs. Why?
- Corporate Bond spreads hitting new record tight spreads. Why?
Conventional market wisdom says stocks will rally and bonds tighten when the economic outlook looks priced for perfection. For the upside expectations to be so high – either markets know something I don’t, or I am missing something.
We know there is no such thing as a perfect world. There is a world where things look marginally better than they did a week ago, and a world that looks a tad less unstable than it did.. Heck, there is even a world where Donald Trump is making some kind of sense…! But the overall global political-economic backdrop of populism, polarisation, budget shenanigans, and ingrained incompetence, (on both sides of the pond), is hardly a screaming buy signal.
Yet the markets, bless them, don’t seem to have any problem believing umpteen apparently implausible things before breakfast:
- Rates are set to ease – the Fed has now said it might happen as early as the summer.
- Corporate profitability expectations are rising – so say analysts, and CEOs aiming to finance themselves in the private capital markets… where money is an abundancy problem, and terms and transparency are… definitionally murky.
- Despite all the TACO Tariff confusion, turns out the anticipated supply chains issues are not generating massive inflation or holding down consumption … at least not yet.
- Productivity is expected to rise faster than costs – as firms reduce hiring and cut wages to reflect AI replacing these expensive and pesky humans. (Caution: read HHGTTU for the consequences of not hiring staff to sanitise the phones because immigrant labour costs are too tight.)
- Markets are awash with cash looking to finance the corporate sector.
- Corporates are set to make so much money they will be paying big dividends, and fewer and fewer bond credit teams will fear the repayment of principal and interest on their debt.
That would seem to be the economy the market perceives. If only I could buy a quarter of whatever it is they are smoking….
The issue of corporate debt really worries me. If all the economists who are predicting stagflation (rising inflation and a downturn, even as the Fed raises rates) on the back of Trumpnomics are right then surely corporate spreads should be widening?
Maybe not. The reality is many of Trump’s policies towards Big Oil and Gas Guzzling Autos are bond friendly for big US corporate issuers. Many crossover and high-yield bond issuers are benefiting from the implications. If Trump can bounce the Fed into early easing, and gives the impression of dovish successor to Powell, again a clear path to lower rates is corporate bond friendly. Where it would get messy would be a TACO recession in Q3/4 – which the market is discounting.
One story that’s caught my eye is Meta seeking to raise $29 bln to finance its data-centre programme – yet it wants to do it via the private credit markets. Even more confusingly, it wants to issue liquid tradable debt in private credit…. Which is exactly what the long-establish US public corporate bond market has been doing for decades.
What’s really going on here?
It sounds like Mark Zuckerberg is doing a mates-rates deal with his “Dark Enlightenment” chums in the Private-Credit / Hedge Fund world.
(I’m using dark enlightenment (“DE”) to describe the coterie of Tech Billionaires, Silicon Valley financiers, and Peter Theil linked hedge funders who are the real power-brokers yanking Trump’s chain these days. (Elon Musk is very much outside that group – far too volatile, showy and talkative for their tastes..) And yes, I do wonder if the DE gang dress in dark robes, chase each other round the woods dressed in animal skins, and were wearing Venetian masks at the weekend. Do they worship a blinking eye on a pyramid…? Of course they do… Heh heh heh..)
It makes sense for Zuckerberg to build links and align his growth with the Private Capital funding chains – Apollo, Carlyle, KKR, Brookfield, Pimco et al. These private credit funds now control trillions in “Alternative Investments” and are attracting more and more investment funding as retail is allowed through the doors.
In many ways the funds controlled by the largest Private Credit funds are now significantly larger and simpler to activate than going through the rigmarole of a public bond issue. It’s all part of the evolution of the financing business in the post-investment banking era. The smartest and most receptive minds in finance are now longer at Goldman or Morgan, but at the big funds. (And they are not dark lords either!) These firms are building long-term funding relations with capital hungry tech to control future funds flow, and thus growth. It’s exactly what the investment banks were doing 20-40 years ago in their prime…. Just less visible and less transparent. (Remember how the age of investment banking played out – yep.. Lehman.)
Tech firms aligning with capital is a developing theme. Open AI is funding its $15 bln data-centre build out via Blue Owl, while Softbank was in the frame for the $500 bln Open AI/Oracle “Stargate” spending programme announced on day 2 of the Trump second-coming – which has since fizzled into silence.
If the largest funders are now going to private credit, that is diminishing demand for funding from the public bond markets – which will be a factor in why bond spreads are currently so tight, despite the underlying macro concerns.
Yesterday, I was even told investors are buying corporate debt because its more trustworthy than govt debt. Really! I have offered them a free emergency remedial course on money, markets and debt… but one chap thinks corporates investing their Treasuries in BitCoin are pretty much perfectly hedged. He even reckoned stablecoins a better investment than outright dollars… Explain… no please don’t even try.
The last time I was this conflicted about “priced to perfection markets” was during the QE rally of the 2010s. It didn’t matter how poor the economic numbers were, how lacklustre the economy felt, or how bogus the upside narratives sounded. All that mattered was overly cheap money (the consequence of QE) was flooding markets, keeping bond yields low, flat and even negative with the consequence of pricing all financial assets higher. It fuelled innumerable highly speculative investments (including NFTs, SPACs, Memestocks and Alt-Coins and all the other madness of the pre-Covid era.)
How quickly we forget.
Through the QE era, the expectation of cheap money made financial assets more valuable. I called nonsense on that – screaming it simply made them overvalued… But they remain as overvalued today as they ever were. And the markets just keep on buying, and buying some more. My proof the equity market is daft remains Tesla – need I say more. It would be expensive at 10% of its current value – but retails believes…
When the crunch comes, if it ever does – a massive reset from higher not lower rates, with a dollar crash – then maybe the message will finally hit home.
I think I must be market neuro-divergent – in that I don’t get caught up in the froth. That’s the difference between an Equity buyer – unbounded optimism and belief, vs a Bond Investor – dour pessimism and scepticism. I’m a bond guy and have a low bullshit threshold. It means I don’t listen to the grandiose promises of analysts and CEOs spouting BS about prospects for AI and crypto.
Problem is… much of the market apparently does.
Out of time, and back to day job of trying to understand markets…
Bill Blain
Author, The Morning Porridge
Partner Shard Capital
6 Comments
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I would be interested to know if, in your finance world, you feel you are a lone voice amongst the madness or if there are many that share your views, but are perhaps less willing to voice their concerns.
I think many do share my perspectives on markets – not on all aspects, or outcomes, but broadly I believe most real financiers are far more nervous than the apparent strength of markets suggests.
Each morning’s porridge is largely based on my discussions with clients from the preceding day during my day job in alternative assets.
For instance, my stance on Tesla is supported by at least 90% of the institutional investor base I cover. However, most retail investors remain convinced he’s a genius.
Everyone has opinions, and that’s why we have markets..
Yes it is all very confusing and unsettling, nothing in my experience really qualifies me for the current set of circumstances!
Great comment from a bond client that the META private credit deal is really all about “Regulatory Arbitrage” – you can do things in Private Credit that would give banking regulators coniptions!
And, you can’t make this up:
“Peter Thiel jins tech billionaires backing new lender Erebor to rival Silicon Valley Bank” in FT.
https://www.ft.com/content/8c903f2e-42a6-496b-b098-ca733f340ffc
To add to your paragraph about the 2010 QE, have we really seen the end of the liquidity flood? I’m not saying the tap is still on, but wealth and assets haven’t gone away yet, and they look for the means to increase. 5%-7% money is “normal” for many of us, and businesses that are well managed have prospered with this construct. In fact, 5% is a “good rate” historically. I think part of what you are seeing is the result of much of the economy getting back to this normal, chugging along like old times, and there’s STILL liquidity out there looking for a home.
I’m with you, though, in astonishment.
We haven’t talked about zombies in a while, but I wonder if there will be some refinancing bloodletting showing up on the fringes?