Reddit traders are helping to inflate a bond bubble: Ark's Cathie Wood
The massive short squeeze that sent GameStop (GME) shares soaring 1600% last month was the final shred of evidence needed for some investors to declare the stock market bubble officially here.
Not so fast, says Ark Invest CEO Cathie Wood.
“I will not believe we are in a bubble in equities,” Wood told Yahoo Finance Presents.
In fact, Wood says Reddit traders are “aiding and abetting the bond bubble.” She noted that many of the companies getting the attention of these traders had been “left for dead by innovation,” and so the value of their bonds had been depressed. Because of the high risk of bankruptcy, refinancing costs for these companies have been extremely high.
But the surging stock prices fueled by these retail traders have given these companies an attractive source of capital.
“They're actually accessing the equity markets. They're not refinancing the debt,” Wood said. “They're accessing the equity markets and their bond prices are skyrocketing.“
She also went back a bit further, noting funds have been flowing out of equities and into bonds since 2017. For Wood, this is further evidence that if there is a bubble in the markets, it’s in the bond market.
“I believe bonds are in a bubble,” she said. “I believe what just happened with GameStop and AMC (AMC) and American Airlines (AAL) and Bed Bath & Beyond (BBBY) — all of those — is exacerbating the bond bubble. Because you're bailing those bondholders out, so they can put money elsewhere.”
“I would not be putting my money there”
The action fueled by retail investors on Reddit’s WallStreetBets has garnered attention for its impact on hedge funds that have been short stocks. But Wood says it’s the action in the bonds for the so-called meme stocks that has caught her attention and she’s not buying.
See Also: Why Ark's Cathie Wood remains bullish on Bitcoin, Tesla
“If you ask me, a student of innovation, maybe there's a shot of survival here and maybe more so now that they've been able to do an equity offering, which they could not have done two weeks ago, maybe,” Wood said. “But I would not be putting my money there. I want to be on the right side of change.”
For Wood, the trading action is an interesting phenomenon, but not one she thinks will last.
“I think it's been a good wake-up call for investors generally to understand who is doing what and why,” she said. “Truth will win out. Make sure you're on the right side of change, because there is so much disruption and destruction taking place out there. And it will take place at an accelerated rate during the next five to 10 years. So be careful.”
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Jen Rogers is an anchor for Yahoo Finance Live. Follow her on Twitter @JenSaidIt.
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