This chart illustrates the increasing importance of cheap money, which is being driven by buybacks. Once interest rates get to a certain point (via Eurodollar futures ) the S&P 500 falls apart. The point at which it falls apart seems to be dependent on a certain downward-sloping level. Historically, interest rates prairie dog above the meme line for a bit but once they go back into their hidey holes the top of the S&P is close. With my luck the Brent Johnson's dollar milkshake theory will probably be right and the complete opposite will happen.

Okay that's great. At least we know yields will eventually make their way down to 0% so... all in bonds then, right? Not exactly. Take a closer look at the available bond funds, specifically the allocation to corporate credit and the ratings of that corporate credit. There is a solid chance that you will see a lot of BBB . BBB is the last level of "investment grade" debt before it becomes "junk". Once it gets downgraded to junk the pension funds and insurance companies that own most of it are required to liquidate it. The BBB bucket alone accounts for roughly 54% ($3T) of all corporate debt and dwarfs the size of the junk bond market and if the downgrades start happening the junk spreads will get blown out.

My prediction: the floodgates will open when a seemingly healthy company defaults due to drop in revenue (and subsequently free cash flow due to being overleveraged) and the ratings agencies are forced to start downgrading companies that should have been downgraded a long time ago.

Fear of being downgraded will finally sink in and companies will be forced to look at their margins and free up cash. The first order of business is reduce largest portion of SG&A: payroll. A gigantic portion of the population is nearing retirement and they will be the first to be shown the door It sucks but that's just how it works. On top of that, all of these people that just got retired are trying to hit some magic number and are either 100% S&P or 100% "X Retirement 2025" fund, which consists of a lot of equities and a ton of BBB garbage that doesn't know its garbage. So no income, no available jobs, halved 401k. Fantastic. Time to downsize but unfortunately there is nothing to downsize to because everyone else is doing the same thing. Only option is to build, rent, move in with children, or buy a double wide. So I like small houses and ELS , which is a trailer park REIT.




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