What the phenomenon of cheap credit has accomplished.
You’d think that corporate debt would grow in proportion to total sales, as this additional debt is used to fund investments in productive activities that create more sales and contribute to the economy, and that higher sales, and presumably higher earnings would create a proportionate increase in the value of the company, and thus in its stock price, and that they all go up together, not in lockstep but over time more or less at the same rate.
But that relationship between debt, sales, and share prices has gone completely out of whack.
First things first: Debt at nonfinancial companies – this excludes banks and nonbank lenders such as mortgage lenders – has soared. To get a feel for just how much, I have pulled the data on three major components of corporate debt:
Bonds issued by US companies in the US. Outstanding balances never even dipped during the Financial Crisis; they only flattened for a few quarters at around $2.97 trillion. Since them, outstanding bonds have soared from record to record, in total 76%, to $5.2 trillion.
This does not include bonds that US companies issue in other currencies in other countries. For example, it does not include euro bonds (“reverse Yankees”) that are hot in Europe, where junk bond yields are at a ludicrously low 2.35% on average, and the high-grade yield is just above zero.
Commercial & Industrial loans fell sharply during the Financial Crisis as banks stopped lending and as demand from companies withered. After peaking in Q4 2008 at $1.56 trillion, C&I loans fell to $1.19 trillion by Q3 2010. Then they soared and started setting new records in early 2014. By October 2016, they were up 35% from the prior peak and 77% from the trough – though they have largely flat-lined since then.
Commercial paper (short-term debt that money-market funds pick up) went through some trauma during the Financial Crisis when the otherwise highly liquid commercial-paper market froze up and companies relying on this market, such as GE, suddenly found themselves unable to do basic things, such as meeting payroll. Money-market funds “broke the buck” and chaos ensued. The Fed, in its function as lender of last resort, offered numerous short-term loan programs to keep the system afloat. Since then, the use of commercial paper has waned and outstanding balances have fallen 43% since Q1 2008 to $1.04 trillion currently.
The chart below shows the outstanding balances of these three forms of corporate debt combined, as issued in the US by nonfinancial companies. This includes debt issued by privately held companies, such as Toys “R” Us, which is owned by private equity firms and just filed for bankruptcy with disastrous consequences for some of its bondholders. These three categories of debt combined have soared 35% from their peak and 52% from the trough:
So given this sharp increase in corporate debt, business sales should be on a similarly red-hot trajectory.
Total business sales in the US as estimated by the Census Bureau represent sales of businesses of all sizes, whether publicly traded or privately held, but does not include sales in other countries.
Turns out business sales have been miserable in recent years. In Q2 2017, they were right back where they’d been in Q3 2014, after a hefty dip in between. This makes for nearly three years of stagnation. They’re up 40% from the depth of the Financial Crisis in the first three quarters of 2009, when everything ground to a halt, and just 12% above the prior peak in Q2 2008.
The chart below shows the V-shaped recovery in business sales to the level of the prior peak, reached in Q2 2011, and the very uninspiring performance since then:
So the values of the companies should have moved somewhat in parallel. But the Wilshire 5000 Total Market Index, which tracks all publicly traded companies in the US, has soared 100% since the prior peak and a stunning 347% from the trough.
Even more telling: Since Q3 2014 – as sales went nowhere – the Wilshire 5000 Index has soared 34%:
In short, debt jumped 35% since the prior peak before the Financial Crisis, as sales rose only 12% over the same period, but stocks have doubled from the highly inflated levels at that time.
It’s all part of the phenomenon of repressed yields and cheap credit: Companies are borrowing large amounts of money to buy back their own shares and to buy out each other, instead of funding investments in productive activities. The hype around these share repurchases and M&A fires up stock prices and contributes to the current stock price bubble, but does nothing for the economy and leaves corporate America and share prices in a very precarious position.
Hype works, until it doesn’t. Read… Global Stock Prices Fueled by Ugly Earnings
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Nothing to see here!
Everything is A Ok
Automatic Pilot engaged!
All Systems Go!
Automatic pilot engaged. Course set directly to hit Mt Erebus exactly halfway up.
“Automatic pilot engaged. Course set directly to hit Mt Erebus exactly halfway up.”
Dont forget the drunken American air traffic controllers at McMurod. If they had been doing their job instead of partying, they would have picked the Height error.
A lot of people died in that incident.
It is all unicorns and rainbows. Drink more cool aid. Party like a rockstar. Everything is awesome!
To some, it’s actually that simple.
Sticking someone else with the bill is as old as time. People do it for a free lunch. Sometimes for a literal free lunch. Sometimes to cheat on an expense account. Sometimes to encourage someone else to borrow a huge sum so a third party can skim off the proceeds. Stories abound of organized crime figured forcing business owners to borrow while the criminals take the cash using various ploys that look business like but are actually theft. Stock buybacks are a version of the latter, but completely legal.
Another example of sticking someone else with the bill is Globalism – it’s a wealth transfer scheme using low rates, low wages, and open boarders to take money from one group to benefit another without providing any benefits in return. Another is that some people still believe the ECB will quit QE after inflation is discovered … sorry, it’s just another version of a free lunch scheme only on a Continental scale.
If I were a teacher and if this were a class, I would give this assignment: Tomorrow, by next class, find five examples on your own that show how people glom a free lunch at the expense of others. Big or small. Once people start seeing how common it is to see someone stick someone else with the bill for something, they will start to recognize how many public and large corporate finance schemes are exactly the same thing.
I think most people reading these comments understand this.
Yet sticking someone else with the bill keeps happening. Over and over. On small, medium, and continental scales. So, people may know this but they still keep picking up the tab. It’s my hope that a few will awaken from dull awareness and stop picking up the tab.
Junk bonds are 2.35 %!
God I would have guessed 6 or 7.
Picking up pennies in front of a steam roller?
This MUST be some kind of currency play, where they are in US$ and these guys think the $ is going up.
Nonsense. Portugal Telecom euro denominated bonds yield a mouth watering 60.19%. The catch? They are D-rated, with D meaning “Default”. ;-)
If you are feeling slightly less adventuorus you can buy BB rated euro denominated FCA bonds maturing in 2024 yielding all of a princely 1.23%.
Would be interesting to see how many of these reverse Yankees are inside Eurozone and how many are outside. As well as how many aud/cad/RMB they are buying the USD has been a popular choice for hedging im EUR(and so has GPB/chf) so if you think brexit might be an issue moving your backup from GPB/chf to another currency more removed from Europe makes sense.
I wonder what the situation is re: Puerto Rico debt. The judge overseeing the work- out just suspended the proceeding because of the hurricane.
I don’t see much point in re-starting the talks except to announce the debt is being written off, maybe subject to oversight. Or they could do the de facto write- off where you replace the debt with 100 year bonds paying .5 % or something that let’s you pretend the money hasn’t gone to ‘money heaven.’
The issue will be when people ask the Administration what they’ve done for PR, they may say: ‘Lots. We gave (forgave) them 70 billion.
Fair enough, maybe. But PR needs several billion to just get the basics functioning. FEMA’s flood insurance dept is already bust, thanks to Harvey.
So barring a Fed gov handout, PR is going to have to issue new debt.
This will sell like hot cakes, if there is a Fed guarantee.
Speaking as complete illiterate about the Caribbean in general, I don’t know why there isn’t more tourism in PR ( I mean before Maria)
It has same climate as the former high end places ( St.Thomas, Antigua etc.) I assume it has beaches. Is it violent?
I trade using Robin Hood with no leverage. What if I sell everything and wait for the day of the upcoming crash to go discount shopping for rock bottom stock.
How many days do I have to wait after selling my stocks before I can legally buy without a trading license.
I view market meltdowns as going to a great clothing sale where everything’s at a huge discount.
Kate, real bear markets don’t involve quick falls and recoveries, they are miserable grinding affairs. And they can last a lot longer than people think. They are studded with false dawns that lure investors in only to be creamed by the next down leg. By the time they end, everyone is disgusted by the stock market and their own losses.
It is literally impossible to call bottom in real time, you can only see it in retrospect. The reason is that you don’t have a yardstick to judge with. How high is up, how low is down ? Between October of 1929 and July of 1932, the market fell a full 90 %. By that time, few had the guts to buy stocks. And this market could fall that far.
If anyone could recognize a real top or a real bottom, trading would be a very easy and simple matter.
But if everyone knew in advance when they occur, you’d never get to that real top or bottom because everyone would front-run them and cause different results :-]
Sometimes you can pick them, when that happens (At least for me its like an Epiphany) The Bottom on the US $ index post QE III and the top on the Eur prior to that are 2 I got wright. And a Yen dollar bottom.
Its not what you should be trying to do. What you should be doing is seeking confirmation, normally a double bottom/top to go with the point, then buying/selling after the confirmation. With currencies and metals.
That dosent really apply to stock indexes any longer and defiantly not individual stock’s as the stock markets. Particularly the US ones, are simply to rigged to ever consider trading individual stocks, with out good insider information.
This is why fintech startups are massive. Computers don’t succumb to hype. Of course as wolf points out its only helpful to the first few.
…and, stock prices in 1950 were about the same as they had been in 1932. That’s a long time:
If you were a buy and hold guy in the market in Sept. 29, you didn’t get back to even until 54.
(not sure if this includes dividends)
“It is literally impossible to call bottom in real time, you can only see it in retrospect.”
So true. A dead cat bounce is only evident after the first rebound.
Sometime momentum chasers will push that bounce higher than it would normally go – thanks to the “Buy The Dip” mentality and sell-side cheerleaders.
I think looking at the “wash sale rule” in the US would answer some questions.
Sales up 12%, debt up 35%, and stock up 100% from the 08 peak.
Honestly I was expecting a higher debt % increase.
Although 3 x sales increase is still very bad, as it equals borrow 3 to get 1 which is worse than end of US Qe ratio’s.
That 12 and 35 is above the last huge problem.
Yes I know .
but ” “Honestly I was expecting a higher debt % increase. ” “
An economy is supposed to generate wealth, but all this one has produced for years is debt. To make matters far worse, the debt we’ve created was not for investment, it was for consumption, much of it frivolous consumption. What little actual wealth we have created has mostly been stolen by our shady businessmen and venal politicians.
To listen to our “leaders” we are Masters of the Universe in our threadbare capes and tights. What rubbish. We are about to relearn one of the oldest rules in the book. The fastest way to become poor is to try to make other people think you are rich.
“it was for consumption, much of it frivolous consumption. ”
You mean like paying over US$1000 for a mobile phone?
And which company has been the greatest wealth creator in the US stock market since 1929?
The one that makes those fancy phones: Apple.
Says it all.
The question ought to be; when does this pop because this isn’t sustainable.. The only ones who made out were the insiders; CEO’s and those who got stock options and had a conflict of interest between what was right for their companies and what benefitted themselves and whomever in fantasyland believed that this was never going to end. When bubbles pop everyone says it was so obvious, it just had to come to an end and only fools thought otherwise but when this goes south it will take down the whole house because everyone with money has already bet it won’t..
Everyone and their grandmother is prophetic regarding overvalued sticks and why they should fall.
Bill Gross, Mike Bloomberg etc…
But why aren’t they falling? Or why would the musical chairs ever stop?
God knows I want to short AAPL, TESLA, Facebook , Amazon and Netflix ?
Compared to Tesla Apple is dirt cheap. Apple sells stuff on which it makes a profit.
Nonfinancial business debt relative to GDP is about the same as the 2007 prior business cycle peak – ~75%.
See Yardeni, Figure 6.
Comparing growth rates in business debt to sales growth in the goods sector (manufacturers, wholesalers, retailers), which is less than half of the economy, doesn’t seem instructive.
And as you are aware, the downtrend in sales in 2014 was petroleum related.
GDP is an irrelevant measure for this business-focused data because 70% of GDP is consumer spending and because GDP also includes government spending, and investment.
Yes, the sales decline was in part related to the price of oil, among other things. As is the rise in sales since. All rises or falls in sales are related to something, but just because they’re caused by something doesn’t mean they are not there.
“GDP is an irrelevant measure for this business-focused data because 70% of GDP is consumer spending and because GDP also includes government spending, and investment.”
And thus the beauty of financial journalism is revealed.
When it is desired to present something dreaded, such as the current Inflation Rate, they can toss out certain expenses such as food, energy and to a certain extent – housing costs due to “hedonistic” or “seasonal” adjustments. Yet, any rise to those very same parts of the indices deemed “too volatile” to count in the CPI are gladly thrown in when calculating the GDP or corporate profits.
Us laymen are growing more confused every day as to the true state of the economy. For some reason the rosy press releases just don’t seem to match up with our on-the-street observations.
A few years ago (5?) the UK narrowly missed a widely predicted recession. The reason: it was a cold winter and fuel bills were just high enough to nudge GDP positive.
So avoiding recessions is easy: just leave the windows open.
Or build a pyramid.
Great article, is this an American company issue?
What I mean by that is that in the UK using all the stats show Corporate debt has been either stagnant or reducing.
The small to medium sized companies in the UK have reduced their debts substantially but also have built up cash reserves which can be used rather than using credit. There may also be a slowing down of investment into future projects.
The only element of the UK where debts have gone back to 2007-08 levels is personal debt which is another story in itself.
There could also be a positive slant on this story in that some US companies are investing-buying up foreign companies, I’ve seen that in the UK especially over the last two years.
I don’t have data on global business sales, but here is an article that shows how global earnings are now finally back up where they’d been in 2011, but are still below the 2008 peak, even as global stocks have surged.
Replacement of the real, sustainable wealth which is generated by the manufacturing and export of goods, with the illusory, temporary wealth effect which is enabled by cheap credit and consumption.
The ‘victory’ of the neoliberal economic model whose whole purpose is to hand over a country’s economy to financial speculators, who will then hand us ‘trickle down’ crumbs from their overflowing table in the form of low-paid retail and service jobs to keep them in designer clothes, coffee and fancy restaurants.
We have been duped. Massively.
The reality of this is why we will see more and more populist candidates in Europe and the US rise. Sadly they are lacking fresh ideas and mostly spouting nativitst and socialist nonsense, but it’s still a reaction to globalist policies that have failed large chunks of the electorate.
Sales are often not inflation-adjusted and even when they are they tend to underestimate it, often by a large margin. That’s why everybody seems to love inflation, except those who are not compensated for paying for it.
So my question is: how much of that 12% growth in sales since 2007 is due to truly higher sales and how much merely to higher sticker prices?
Here is a partial answer: Since the beginning of 2008, inflation as measured by CPI is up 12.4%.
However, business sales may be subject to a different inflation rate, than CPI. They may be impacted by various wholesale inflation measures.
Thanks. Just like I expected the truth is probably neither so rosy nor so catastrophic.
12.4% increase in inflation (CPI), if it applies to business sales, means that there was zero growth in “real sales” since 2008.
You then also adjust debt levels by inflation (12.4%) and you’ll get something like 20% growth in “real debt.”
So on an inflation-adjusted basis: 0% growth in sales and 20% growth in real debt – from the PEAK of the prior credit bubble, which collapsed so spectacularly.
Taking out inflation mean sales increase of 0% (Interesting but sort of expected an answer like that).
I get the impression from watching the Bloombergs-CNBC programmes a lot of the big companies have ran out of idea’s how to make their companies bigger.
The days of double digit growth may have gone forever.
“Here is a partial answer: Since the beginning of 2008, inflation as measured by CPI is up 12.4%.”
And sales increased 12%.
LIGHT BULB FLASHES.
“What little actual wealth we have created has mostly been stolen by our shady businessmen and venal politicians.” – junglejim
Not true for everybody, Jim.
Wolf has said I could publish this once every six months, without getting called for spamming.
Well, the “bi-anniversary” has arrived!
Bubbles crashing + end of cheap credit + massive credit freeze + growing distrust in unicorns + fear of the future + millions of people losing their homes + ? = Profit!
Meanwhile, Yellen the Felon is bilking savers out of hundreds of billions of dollars a year in interest income, while they are being robbed through the stealth tax of inflation that is much higher than our Soviet-style CPI numbers indicate.
Gershon, please read more than just the headline when you post a link here. The article you linked has nothing to do with Yellen or the US. It’s about inflation and savings in the UK.
I did read the article, in it’s entirety, before posting here. While it may be about inflation and savings in the UK, it’s directly relevant to the US as well, since in both countries you have central bankers keeping interest rates artificially low while real inflation is a stealth tax on savers – with near-ZIRP rates of return forcing them to seek yield in our rigged, broken, manipulated “markets” where they can be fleeced at will by the central bankers’ grifter accomplices.
You can now add the decline of sports revenue to your list. The politics of sports is already putting a big dent in viewership and that will extend to all the stuff former fans are not going to be buying.
Maybe the sheeple are starting to turn off their TeeVees and become awake and aware – perish the thought!
I’m a huge sports fan. But that said, I never spend a penny on sports outside of offering up my eyeballs for the advertisers.
I’ve never understood how/why fans are so willing to donate money to billionaires. Do you really need a team jersey or hat?
If you have a minor league baseball team near you, support them.
Great experience especially if you have kids—great seating, reasonably priced, easy parking, charming old school atmosphere, etc.
There is no revenue decline in sports. ESPN can’t help itself but pay more and more in broadcast fees to the leagues at every contract renewal point.
Also, the dent in viewership likely has very little to do with “politics” despite popular opinion. It’s more likely due to the fact that ESPN is costing more and more to carry and therefore a lot of people are choosing to avoid cable or streaming packages which include it. However, as mentioned previously, that’s not stopping ESPN from paying ever increasing fees to the leagues to carry their programming.
The reason broadcasting fees are rising is mainly due to player salaries having gone completely off the rails. Does it really make sense to pay a bunch of dudes $20+ million a year for shooting ball? I mean, I’m not saying that they shouldn’t be well compensated, but $20+ million? Well, aparanetly ESPN thinks so and is willing to fund this ridiculousity. As a result many folks are doing their best not to subscribe to ESPN (whose carrying costs BTW are far, far above any other non-pay-TV network).
So, at the end of the day the decline in subscriptions has little to do with “politics”. It mostly comes down to economics, as with most things.
What bothers you more, Petunia? A millionaire football player protesting the decline, violence towards and unfairness for non-whites, or a millionaire player thanking/exhorting Jesus for a good game and/or result? Personally, whenever I see a group of players or coaches kneeling in prayer before a game starts, I usually turn the channel.
Although with the news on concussions and injuries these days, a prayer for player safety and well-being might be in line.
In my Province we have a home-grown billionaire (private holdings) made famous for firing the lowest producing car salesman on one of his lots, every month, regardless of the volume sold. This devout Christian did it solely for the message he wanted to send to his surviving staff. Interviewed decades later, he sees nothing wrong with that position. In fact, he said he was doing them a favour as “sales are not for everybody”.
What gets me in this corporate owned world is the feeling that all consumers are duped. No longer do we pay a fair price for a needed product, (including entertainment). It seems like all prices are jacked up until the cracks of decline start to appear and then there is a roll-out of something new. The NFL isn’t a game, it is a violent spectacle full of glitz and consumption.
How about a new tv series? Dupes in Debt. Now, that would be worth watching.
“The reason broadcasting fees are rising is mainly due to player salaries having gone completely off the rails. Does it really make sense to pay a bunch of dudes $20+ million a year for shooting ball?”
Yes. It does. Teams that are perennial winners (New England Pats, Alabama Crimson Tide) make a ton more money than perennial losers. Those high paid players who can take their team to championships pay for themselves many, many times over.
What you say doesn’t apply to the biggest sport of all – the NFL which does a lot of “income distribution” among its league members.
With respect to whether the pay makes sense or not… most of their money in sports comes from broadcasting fees. If it wasn’t for Disney’s must-carry shenanigans with ESPN and cable bundles ESPN would have a lot less money to spend and as such broadcast fees would go down substantially. However, the must carry model is slowly being chipped away and eventually this will start affecting the amount of money ESPN has available to spend (and outbid other entities) on broadcasting rights and that will eventually trickle down to player salaries.
You are right on the money about ESPN. Max is completely wrong. I proved this with the Macy’s boycott and stock collapse, which was a touchy subject for some.
I’m going to have to ask my dear old Grandmother what she thinks about this stuff—she watches all the sports and has all the packages $$$. She’s not very political but loves TV (I assume like the vast majority of ESPN viewers). If she cancels, it’s game-over!
I highly recommend turning off the b00b tube/idi0t box. If you do, please update us on your thoughts a couple of months later.
One great investment in sports franchise history was the 2010 purchase of the Golden State Warriors by Joe Jacob and Peter Guber for $450 million. This was right after Steph Curry was drafted in 2009.
Curry signed a 5-year contract this summer for $201 Million. Crazy amount in some respects, but since Curry and his team have been doing so well, the Warriors franchise is now worth $2.6 billion!
The crazy money in European soccer transfers is potentially troublesome for the health of the sport. Paris Saint-Germain’s acquisition of Neymar Jr. from Barcelona and Kylian Mbappe from Monaco cost around $475 million – before paying the athletes’ salaries. PSG was bought Qatar Sports Investments, an arm of the Qatari government in 2011 and 2012 for around 80 million Euros. Forbes values it at 775 million Euros, but that will surely increase.
“the Warriors franchise is now worth $2.6 billion!”
It maybe be ‘worth’ that amount on paper, but until it is sold it is ‘worth’ nothing and after any taxes are paid, it will be ‘worth’ even less.
Just find another ‘fool’ to buy it is all they need now to justify that ‘worth’.
Especially now with the boycott of the NFL.
Cheap money has fueled this huge climb in certain assets. I’ve noticed that the mortgage business has been steadily relaxing underwriting standards as the market has advanced. It’s not crazy yet, but it may get there.
Jesse Felder wrote about this recently:
Like Wolf, he too suspects that most of it was used to fund stock buy-backs and mergers – thus juicing up stock prices but generating little added economic value for the huge heap of debt that’s been taken on.
That’s why I believe that this bear will be a lulu. That the market is a bubble is a “gimmee”. The thing driving it is confidence that the Fed doesn’t have the courage to let the market go down. I suspect that while Mr. Market is correct, the Fed won’t be able to prevent it. Confidence is fine while you have it, but when it gets shaken, it’s very hard to re-establish. Many corporations are awash in debt and use dodgey “smoke and mirrors” accounting techniques. Once the slide starts, bargain hunters will have to be very, very picky,
Everyone looking for a global market crash.
Ain’t gonna happen. No way. The entire system will be kept afloat.
We are now in the early stages of slowly leaking lower, as these latest bubbles in everything slowly deflate. When they reach a stage of real concern by the worlds central banks, they will be pumped back up, to begin slowly leaking lower again.
One has only to look at Japan over the past 25 years to foresee where the west is going to financially end up. The exception being the two elementary kids in the school yard, yelling insults at each other. Now standing toe-to-toe and waiting for the first punch to be thrown. Once that happens all bets are off, as mushroom clouds grow above population centers.
“Once that happens all bets are off, as mushroom clouds grow above population centers.”
China intends to stop it seconds before it gets there. Painting themselves a Halo as the new world peacemaker and leader, and the US. Sulfur coated Horns and Hooves in the process.
Either way the chines have it set so they win and Ameica looses not matte how it plays out. DPRK is their puppet andt hey are using it to play the US like a violin. They have been doing so for over 66 years, so they are getting quiet good at it.
Lets hope they don’t blow their brinkmanship game, as they are dealing with and unpredictable, petulant, infant, in an old man’s body, with nuclear launch codes.
I would never try to predict the actions of such a creature..
Most of the developed world would be doing very well to end up like Japan. The situation there is largely misunderstood.
The debt is largely held internally, denominated in yen, not US$.
Exports just hit a record ( see nearby driveways)
Violent crime by US standards is non-existent.
By Japanese standards much of US infrastructure is dubious.
The Prime Minister appears to be sane.
Compared to Japan a lot of the EU are basket cases.
PS: Japan is number one in life expectancy at 85 years thanks to a number of factors including universal health care and, some think, diet.
The US is number 54 at 79 years.
You are talking to “Ears that will not listen” on this.
The Tokugawa Shogunate was bankrupt from day 1. it lasted over 250 years, until Americans interfered in the process, which as a major contributing factor, to what Europeans consider “Japanese Excess” 1890 1945.
The Japanese know what they are doing when it comes to maintaining Bankrupt Systems.
Problems only occur when outsiders interfere.
The worst Economic thing Japan has done since 1945, was agree to the plaza Accord to prop up America.
This resulted in the Japanese “Lost generation” and only staved off Americas problems until 2008. A generation of Japanese Sacrificed, so America could “party on” for another 15 years (app), an insane waste.
Even with their Issues, I know which group I would rather sit down with, any day.
All made possible possible since the Valley of The Silicon Gods have unlocked the secretive powers of the infosphere, otherwise known to the enlightened as “The Third Eye of the Holy Grail”.
Dick Tracy and friends (Obligatory reference to Nick Danger) would be proud.
Forward, into the past!
today’s Hussman article confirms the notion that corporate cash (on the sidelines) is really a myth..
With the central tendency of real U.S. GDP likely to average a sustained growth rate hardly above 1% annually in the coming years, investors seem to underestimate how little will be required to push the U.S. into recession. Nor do they seem fazed by the fact that 75% of all corporate debt issuance is now “covenant lite,” that corporate debt as a ratio of non-financial corporate gross value-added has expanded to the highest level in history, that financial assets represent nearly half of the total assets of even non-financial U.S. corporations (where less than 10% of this represents cash and equivalents, and nearly one-third is in stocks), and where those financial assets comprise literally 90% of the total corporate net worth of these companies. The cross-dependencies here are outrageous.
Hussman’s performance as a money manager is in the bottom 1% over 3, 5,10 and15 years.
Do you want to know how exceptional that is ? It’s rarefied air of the thinnest kind. Performances that atrocious are very, very difficult to compete against.
In the long run Hussman is right. Eventually cash flows do matter. When that happens the market will tank.
However, the market can get well ahead of itself for a very, very long time, especially when goaded along by central bankers.
I was commenting on Hussman the hedge fund manager, not Hussman the forecaster.
He stayed bearish (hard negative) since the S&P 500 was at 667 and has since picked up a 1% management fee every year throughout his half cycle. Good for him and his permanently bearish disciples.
@akiddy111 If one actually used Hussman’s forecasting models they would actually been strongly advised to go all-in at the 666 point.
I don’t know what Hussman was actually advocating advice-wise at the time but if all you did was use his models then you would have been very well rewarded return-wise.
When assessing total debt, it might make sense to make reductions for XS cash on hand. Companies have $2.4T excess cash offshore because they can’t repatriate it for tax reasons. However, US companies must fund dividends and share buybacks, so they have taken out debt. Thus, there has been a gross up of the balance sheet to some degree, and the debt is not “bad” if it is offset by cash overseas.
It depends whether those piles of cash are included in companies’ balance sheets or not. If they do then there’s still a problem (see my link to Jesse Felder’s article above where he uses GVA in his calculations).
I would have added a few paragraphs as to how the CB, big banks and financial institutions have supported and manipulated the stock market’s meteoric rise above the previous bubble the last few years. Or perhaps that requires it’s own article.
Wolf, you mentioned the losses that have been taken by bond-holders, such as Toys ‘R Us bond-holders. My question: aren’t these bond defaults covered by derivative contracts ? If so, how severe are the losses that the banks may take as corporate defaults mount ?
The losses that creditors will get hit with are currently being negotiated in bankruptcy court under the supervision of a judge. The bonds were held by investors. TRU had leveraged loans which the banks that put them together sold to investors. Banks probably hold only a small part of the $5.3 billion in debt, and I would assume have first dips at the best collateral. I doubt banks have much of TRU’s debt on their books.
Banks have been pretty smart about risky companies, such as retailers. They’ve been selling these risky loans (“leveraged loans”) to yield-desperate investors. That’s not to say that banks won’t occasionally get stuck with the defaulting leveraged loans.
There will be some gains and losses among derivatives traders.
All as part of the FED plan to to extend the mirage of an economic recovery from 2008. Unfortunately the real economy continues to rot beneath all the financial shenanigans. I cannot disagree with JungleJim’s conclusion. The correction should be proportional to the excesses.
People worldwide use the Internet more hours than they watch TV, and use their cellphones way more than they watch TV, in average. And yes that also applies to the US.
So the sheepie are confused more by Facebook, Google and Twitter than TV.
So your “brainwashed by TV” idea us getting more and more outdated.
Please start using something like social media zombies or “Facebook ate your brain.”
Hear hear the new hit by Social Media Zombies, Facebook ate your brain!
Now someone write the lyrics.
I’ve noticed my comments have been removed, W.R. I was right the other day—you censored what you didn’t like. I agreed with Petunia about ESPN and you later removed my comment (as well as those on other articles, but I didn’t point it out). Nothing offensive or divisive was posted, just something that you didn’t care for. People hate the truth because they can’t change facts.
Whether I agree or disagree with some comments makes no difference. But there are all kinds of discussion topics for which this site is not the correct forum. What people think about race and religion are two of those topics. They just don’t belong on this business and finance site.
I didn’t discuss race or religion, nor did I insinuate anything relating to it. Isn’t dialogue when only one side gets to speak!
Petunia made one comment that triggered all kinds of comments (some of them I blocked in time so you never saw them) that spiraled totally off track into race and religion. So I deleted her first comment, which automatically deletes everything attached to it. This stuff has no business on this site.
Thanks for keeping the focus where it belongs, Wolf. There are plenty of other sites for those inclined to spout various opinions or vitriol on race and religion.
Slagging the blogger is bad form, Carlada. And it isn’t “censorship” to moderate (remove) potentially contentious or off-topic comments to preclude flame wars from erupting. If you don’t like it, start your own web site.
My, my, we certainly do have a wealth of detailed and informed analysis here. But does anybody have a solution?
Just kidding. While the problem is economic and financial, the solutions are political, and no genuine solution is politically possible. It is the way it is because that’s how those who have power in the world want it to be, despite the risks, and those are offloaded onto the disenfranchised and disempowered anyway.
It’s like that for nearly all the world’s problems.
the stock market doesn’t really exist anymore. The fed intervenes is all. They have a trading floor. It’s all rainbows and unicorns! It’s been a very long time since we’ve had a 5% correction. As Wolf has pointed out many times earnings just don’t seem to matter as much as they used to.
More or less. Financial markets are closely managed to ensure they benefit moneyed interests, regardless of the destructive externalities, and are mostly useless for honest purposes like price discovery and constructive investment. To be sure, the distortions make a mockery of what these markets are purported to be, and ‘free market’ libertarians are worshipping false idols.
It can only end in tears and much gnashing of teeth for most people, who are in no position at all to keep from being victimized. ‘Equal protection under the law’ is a dead letter, buried and forgotten.