I wrote twice already this week about corporate balance sheets and the accrued blessings of 2020/2021’s generational terming-out opportunity afforded by the Fed’s efforts to ensure capital markets remained (wide) open come hell or high pneumonia.

Corporates, particularly blue-chips, were able to borrow fixed at rock-bottom rates in what, initially, was a bid to fortify balance sheets against a prospective global depression. When, instead, a quick recovery in global demand (on the back of big fiscal stimulus in advanced economies) outstripped the healing process for broken supply chains leading to an inflation upsurge, all that borrowed money became a source of income for the C-suite as central banks raised cash rates.

The rest is history: Net interest burdens collapsed and profitability soared, leaving the best companies with fortress-like balance sheets — and plenty of cash to invest in the next “big thing,” which turned out to be AI.

Those dynamics created a remarkable juxtaposition between corporate balance sheets and government balance sheets, which is reflected in, for example, an elevated MOVE/VIX ratio. Consider the two simple figures below, from a UBS note dated January 22.

There’s nothing especially groundbreaking there, but when you think about stretched equities and sundry bubble warnings, it’s worth at least considering the extent to which corporates are now arguably less risky than sovereigns.

“There would be two ‘justifications’ for a bubble,” UBS’s Andrew Garthwaite wrote. The first is a scenario in which AI delivers on the “promised” productivity gains.

The second — and this speaks to everything said above — revolves around the notion that “government balance sheets are more risky than normal against corporate balance sheets” which, as Garthwaite put it, “may suggest that the ERP over bonds should be lower, especially for those companies” with the strongest financial position, including and especially America’s mega-caps.

Consider that food for thought. If nothing else, it’s a nice addendum to the discussion from the two articles linked above.

Oh, and for what it’s worth, Garthwaite said there’s a “35% chance of a bubble.”

The table above shows that six of seven “bubble preconditions” are currently met.

“If, for example, the PBoC print[s] or the Fed reduces rates to [3.25-3.50%] then we could have all seven,” Garthwaite went on.