11 ms·

Netflix's Junk Bonds Explain How We Are in a Corporate Debt Bubble

• johnebgd 7y ago
  We are in an asset bubble. All assets. Bonds are an asset.
  • echelon 7y ago
    Assets? Physical, material goods? Or investment vehicles like bonds and funds? What happens when the bubble bursts? What doesn't lose value? Who doesn't wind up underwater?
    • 0xCMP 7y ago
      Anyone with cash and low-leverage cash producing assets.
      • paganel 7y ago
        And it will be a challenge deciding who really has cash and what cash really means when the bubble will burst. I remember that for a short but intense period of time money-market funds were in negative territory in late October 2008, which was really interesting because they were seen as basically cash (rightly or wrongly, that’s another discussion) and a run on them would have made many people very, very unhappy.
      • bra4you 7y ago
        This is a pretty good answer. With cash you are total contrarian in the current environment. But this strategy also comes with risk. "Haircut" etc.
    • tempsy 7y ago
      Gold
      • aedron 7y ago
        Wow, downvotes. The hate for gold is strong, never really understood why. The fact is that gold is one of the few asset classes that are safe.
        • AstralStorm 7y ago
          I wouldn't be so sure, it is only worth much because we believe so. (Likewise platinum.) They will bubble and crash. As opposed to say steel and copper which are tied to industrial supply and demand.
          • tempsy 7y ago
            Money is shared fiction too. The difference is we can print an infinite supply of it but only have a finite supply of gold in the world.
        • ac29 7y ago
          Gold has the volatility of the stock market, with lower returns than bonds: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&asset1=Gold&allocation1_1=100&asset2=TotalStockMarket&allocation2_2=100&asset3=TotalBond&allocation3_3=100 https://www.portfoliovisualizer.com/backtest-asset-class-all...
    • bra4you 7y ago
      "Assets? Physical, material goods? Or investment vehicles like bonds and funds?" Everything. "What happens when the bubble bursts?" Good question. High inflation? Strong recession? Or decades of stagflation? Everything is possible. The future is hard to predict. "What doesn't lose value? Who doesn't wind up underwater?" "No place left to hide".
  • csmnpsc 7y ago
    How can we protect our wealth? move everything into gold and Swiss francs?
    • 01100011 7y ago
      Gold is already up. If I'm going to invest in commodities, I'm heading for less popular vehicles(i.e. platinum group metals... copper... anything but gold).
      • kortilla 7y ago
        Copper is very tied to the manufacturing activity of the economy though so inflation in the face of a slowdown can end up washing copper gains.
    • DataWorker 7y ago
      Buy good Art.
  • meesterdude 7y ago
    Not sure why you think bonds are assets because they are not. Investment 101 stuff right there.
    • krit_dms 7y ago
      right... Informs us all then - what is it? a liability?
      • kgwgk 7y ago
        It is a liability for the issuer :-)
      • McTossOut 7y ago
        illiquid, there's not much of a market for low value verbal agreements.
    • cyraxjoe 7y ago
      Bond -> Financial Security -> Financial Asset -> "non-physical asset whose value is derived from a contractual claim". More details at: https://en.wikipedia.org/wiki/Financial_asset https://en.wikipedia.org/wiki/Financial_asset
      • raxxorrax 7y ago
        Theoretically... If I lend you 5 bucks, I don't really see it as an asset. I believe to call it what it is becomes even more important if we talk about asset bubbles...
        • kortilla 7y ago
          It’s debt owed to you. It can be sold off. It’s definitely an asset.
          • raxxorrax 7y ago
            Maybe, but certainly there is a distinction between that and me keeping the 5 bucks?
  • JamesBarney 7y ago
    What is an asset bubble? And why are we in one?
    • swarnie_ 7y ago
      When the price of an asset doesn't match its underling worth, not strictly true since prices are high but earning are also high, PE ratio looks average in the US. I assume OP is alluding to low interest rates, lots of money being injected in to the system and a select few companies being priced silly high.
      • jariel 7y ago
        "When the price of an asset doesn't match its underling worth" There's no such thing as 'underlying worth' :) A bubble is when prices are high relative to historical or comparative measures of worth, and any degree of volatility can snap such valuations back to historical norms. The thing is - prices can be way out of historical norm ... but it may not be a 'bubble', in the sense that it may take a lot to 'prick' the bubble or change things so that there's a crash. Housing in 2008 crashed due to a bunch of things gone wrong. If any one of those things held up ... there may not have been a crash even with high valuations, even with a fair bit of shenanigans going on. As far as I am concerned, interest rates are being held 'historically low' by the Fed. In any other recovery, the'd have gone up by now. The FT reported however that the Fed is engaging in a new tactic: they are looking not just at unemployment, but those who have stopped seeking work as well. Though unemployment is low, there's still people being sucked into the labour market and they're trying to see how far that can go. So they are less worried about inflation than they are 'true unemployment' apparently.
        • badpun 7y ago
          > There's no such thing as 'underlying worth' :) The primary function of an asset is to generate income - through dividends, rent, bond interest etc. This income determines asset's underlying worth.
          • 7y ago
• m3adow 7y ago
  The site was down for me. archive.org link: https://web.archive.org/web/20200204023040/https://jumpstartbk.com/netflixs-junk-bonds-explain-how-we-are-in-a-corporate-debt-bubble/ https://web.archive.org/web/20200204023040/https://jumpstart...
  • krit_dms 7y ago
    ctrl+f mirror
• 01100011 7y ago
  At what point does the massive pile of money injected into the economy translate into large price increases(i.e. inflation)? IIRC, inflation is the money supply multiplied by the velocity of money, so if the economy slows, will we suddenly see the current asset bubble turn into a price bubble? What then? Does it all just work itself out because we devalue the currency and inflate away our debt and asset bubbles, or do we get slammed by stagflation? For those of us in the tech industry accumulating absurd salaries, what do we do to defend our wealth? Normally when inflation is coming, I'd think real estate or commodities would be a safe bet, but they're already in a bubble. It seems like jumping into them at this point might be better than nothing, and maybe that's all we can hope for at this point in the economic cycle?
  • deleted 7y ago
    [deleted]
  • quotemstr 7y ago
    > At what point does the massive pile of money injected into the economy translate into large price increases(i.e. inflation)? A burger at a nice restaurant in Seattle can now cost you $18-$20. Maybe we're already in an era of more intense inflation and just don't realize it yet.
    • ethbro 7y ago
      Wealth inequality.
    • 01100011 7y ago
      I went to buy a chocolate bar at Target yesterday. What used to be $3 for 3.5oz is now $3.98 for 3.15oz. I think it's been creeping up in some areas for a while now, but I don't see it as inevitable, across the board inflation just yet. Gas is still cheap. Utilities haven't gone up much for me. Rent is definitely up in CA, but I'm not sure how things are in the rest of the country. Generally, I haven't noticed inflation in most things I regularly purchase. Honestly, I work in tech and have a large, fixed alimony payment, so I could personally use some inflation.
• jusonchan 7y ago
  I'm surprised how this made it into HN front page. Looking up the author, it seems it's someone who graduated in 2018 throwing out his theory about bonds and how it's all a bubble with a nice click bait title. The reality is very different though. Bonds are how most large companies finance themselves. And when they can issue a bond that people buy for < 5% yield, it's almost like free cash. Assuming in 2027 - Netflix has say conservatively 220M members paying an average of say $11 (which is less than the average price today, not accounting any price increases). That will be a whopping 29B in revenue. Way more than enough to pay off debt + some in a single year. This is even after accounting for a massive spend on making movies. For context Disney+ spent 1B this year and planning to spend up to $2.4 billion by 2024.
  • zhaso 7y ago
    Not sure if we're looking at the same thing but I found the author to have had a JD for 14 years and finished his undergrad >20 yers ago..
    • jusonchan 7y ago
      This is my source: https://www.avvo.com/attorneys/91103-ca-victor-look-1755244.html https://www.avvo.com/attorneys/91103-ca-victor-look-1755244.... "I came out of school during the Recession of 2018."
      • jusonchan 7y ago
        Looks like that was likely a typo. Seems like the author holds a license from 2008. My key point is about the debt though. I'm sure there are different takes to it, but this is just my own opinion.
      • neurobro 7y ago
        Looks like a typo for 2008, considering "recession" and "over the last 11 years".
  • ddeck 7y ago
    Regardless of veracity of the conclusions, one key issue is that the author is looking at absolute yields, when they should be looking at credit spreads. They state: >Higher rates mean higher returns. A junk bond historically hovered around a high yield of 10%. This attracted investors to the bond despite the risk of the company defaulting Broadly true, but it's the spread above the risk free rate that is important. If US government bonds yield 15% and some BB rated bond yields 16%, one would be unlikely to invest it in regardless of the high absolute yield. That differential is called the credit spread - the amount you are paid in excess of the "risk-free" rate to take the credit risk of the bond issuer (i.e. the risk that they don't pay you back). The reason BB bonds are at 4% is not because the credit spread is at a historic low, but because the risk free rate is around 1.5%. Current BB spreads are low, around 2.5%, but not historically so. They were at 2% in the late 90's, at the current level in the mid 2000's, and actually haven't moved a lot in the last 2 years. This earlier period is the time the author refers to when absolute BB yields were ~10%: Spreads: https://fred.stlouisfed.org/graph/fredgraph.png?g=q4Up https://fred.stlouisfed.org/graph/fredgraph.png?g=q4Up Yields: https://fred.stlouisfed.org/graph/fredgraph.png?g=q4UD https://fred.stlouisfed.org/graph/fredgraph.png?g=q4UD Ps: The St. Louis Fed FRED site is excellent!
• blackrock 7y ago
  I’m waiting for this bubble to pop, and take everyone down with it. This QE insanity has gone on for far too long.. And for the rich.. don’t worry about your assets. The next president will bail you out first.
  • kortilla 7y ago
    Shareholders took huge losses in the bank “bail-outs” in 2008 so there isn’t really a precedent for bailing out the rich. The only precedent is bailing out entire business sectors that the whole economy depends on.
    • blackrock 7y ago
      And who owns the “entire business sectors”?
      • nopenotthatway 7y ago
        The fed got majority of the banks when it bailed them out, and all executives where on a leash, and getting paid less until it was all back to normal. In fact, the fed ended up turning profit, as the banks healed, and the fed sold its part. those "owners" got their assets froze until the situation became under control, and the fed got its money back. All these complaints about savings big banks are just extremist (both commies and libertarians complain about it) FUD. If banks were not saved, the economy, the middle class and the poor would be far worse. and as grandparent said >Shareholders took huge losses in the bank “bail-outs” in 2008 Shareholders are by definition "who owns". Sure there are both Billionaires and middle-class shareholders, but if you have a bigger % of shares, you have a bigger loss.
        • DarknessFalls 7y ago
          The amount of subsidies given to farmers to offset the tariff wars with China are said to eclipse the amount given to bail out the banks. Do you think the Fed will ever see a similar return on investment from agriculture?