Swimming is the new banana bread I am told. My fellow swimmers in the Forty Foot this morning might argue this is a healthier, if colder, development of our pandemic response. Not so in financial markets. Things are hotting up dramatically and possibly not in a healthy way. As of today, Apple is now worth more than all of the blue chip companies listed in the UK’s flagship FTSE 100 index, combined.

Yep, the corporate empire of Boristan and Elgar’s “Hope and Glory” has just been trumped by a $2 trillion mobile ring tone. On a less flippant note, investor capital flows are chasing an ever smaller opportunity set. Big is not only beautiful, but grows bigger every day in a fundamentals vacuum. For illustration, yesterday Apple Inc and Tesla Inc executed a stock split. This administrative exercise has no impact on the valuation of either Apple or Tesla, it merely creates more shares with a lower price. Not last night. Here is what happened.

Apple Inc’s valuation increased by $72 billion.

Tesla Inc’s valuation increased by $51 billion.

The combined additional value of $123 billion generated in just one day’s trading exceeds the entire market value of IBM.

This additional $123 billion “franchise” value would equate to the FTSE 100’s second largest stock, BHP Billiton.

Of course, there will always be “hot” stocks and sectors like technology. A global pandemic has certainly focused investor minds on the winners. Our worry is that governments and central banks might be doing the same. Check out the US corporate debt market. Federal Reserve support of debt markets has triggered a wave of borrowing by large US companies with total corporate debt soaring to $10.5 trillion. Ultra low interest rates definitely help but one wonders whether investor capital is being steered into the right places?

The Bank for International Settlements (BIS) appears to share our fears according to this Bloomberg article:

Companies with annual revenues above $1 billion dominate corporate borrowing now more than any time in at least a decade, according to the Bank for International Settlements. These firms account for 78% of global issuers of dollar bonds so far this year, according to data compiled by Bloomberg.

“Led by easier access to bond markets, large firms significantly increased their borrowing,” BIS researchers Tirupam Goel and José María Serena wrote this month in a report about credit during the Covid-19 crisis. “The rest of the firms faced bottlenecks due to their reliance on a strained syndicated loan market and hurdles in switching to bond markets.”

You may have read lots of the financial commentariat debate the prospects of a “V shaped” recovery. However, the colder reality for many smaller firms is no access to funding as banks tighten lending conditions. This opens up the possibility of what some are calling a lopsided “K shaped” recovery where large firms attract nearly all available investor capital and crowd out smaller firms. Ultimately, the overall economy suffers when capital is misallocated on a grand scale. Current headlines may gush about record, even bananas, valuations but the outcome could be far from healthy for economic recovery. As small firms fail and job losses continue it will not just be the streets of Portland hosting inequality protests…..