
Fidelity chief warns of global corporate solvency crisis - samizdis
https://www.ft.com/content/d6fd7d11-c06e-4e88-82a7-87465c84a120
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mkup
Paywall bypass link: [https://www-ft-
com.ezproxy.babson.edu/content/d6fd7d11-c06e-...](https://www-ft-
com.ezproxy.babson.edu/content/d6fd7d11-c06e-4e88-82a7-87465c84a120)

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BlackVanilla
I wonder what the proportion is between pre-pandemic debt (fuelled by
quantitative easing and low interest rates seemingly)and debt accrued during
the pandemic?

Is it that the pandemic has uncovered a long-standing problem of high
corporate debt since the 2008 Financial Crisis fuelled by quantitative easing
and low interest rates? What other factors are at play here? Or am I
completely wrong?

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Legogris
Hasn't the the vast majority of recent QE been done as a direct response to
the pandemic? (Legit question, it's my impression but may be misinformed)

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masnaox
no. the pandemic triggered the 4th big one.

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Legogris
And when was the 3rd?

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ac29
QE3 was 2012-2014:
[https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...](https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE2,_and_QE3)

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colinjoy
Is that at all surprising when you have corporate execs, hedge funds and
private investors reaching into the cookie jar, not with one hand, but with
both and shovel out the money into their bank accounts?

“The biggest U.S. airlines spent 96% of free cash flow last decade on buying
back their own shares.“

“In 2018 [...] companies in the S&P 500 Index did a combined $806 billion in
buybacks, about $200 billion more than the previous record set in 2007.“

[https://www.bloomberg.com/news/articles/2020-03-16/u-s-
airli...](https://www.bloomberg.com/news/articles/2020-03-16/u-s-airlines-
spent-96-of-free-cash-flow-on-buybacks-chart)

[https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-
for...](https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-
economy)

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pjc50
The thing is, the return of cash to investors (or growth) is kind of the point
of investing; whether that's dividends or buybacks is a matter of tax
treatment.

(Execs looting is a bit more of a problem)

~~~
colinjoy
It is not the same. Dividends reward continued investors who also have a
bigger incentive to care about long term health of the corporation. Buybacks
reward those who deinvest (sell shares).

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xwdv
Why is that a bad thing? The money gets deinvested and then reinvested into
other growth companies, giving them a chance to grow as well.

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take_a_breath
Is there evidence that the returns are “reinvested into other growth
companies”?

Why would a growth company return money to investors? They should be using
that capital to grow.

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ac29
Two reasons that come to mind:

1) Not all growth is easy or cheap. Investing $X to grow by Y% doesn't mean
you can invest 2$X to grow by 2Y%. At some point the ROI is close to zero or
even negative, though I would agree with risk-free interest rates also close
to zero, nearly any positive ROI is better than cash distributions.

2) Some investors want a portion of profits to be distributed when a company
is doing well. Investing in growth is a risk, distributing cash is not.

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take_a_breath
Once the value of distributing profits outweighs re-investing in growth, you
are no longer a growth company.

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a3n
In the US and elsewhere, the pandemic has shown some dangers of too much
reliance on JIT, just in time stocking and use.

Just in time _income_ seems to be as risky, if not worse.

In both cases, everything's fine as long as everything's fine.

EDIT: Mildly interesting side note: I'm an OTR semi truck driver. I am
sometimes assigned trips that are designated JIT. There is usually a note
included with a JIT trip stating that late delivery will result in work
stoppage at the destination.

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llampx
> I'm an OTR semi truck driver. I am sometimes assigned trips that are
> designated JIT. There is usually a note included with a JIT trip stating
> that late delivery will result in work stoppage at the destination.

Interesting. Do these trips pay better for the associated stress on your part?

~~~
a3n
No, same pay (but I'm only one guy in one company). And they're really no more
stress than any other trip, they just require that you pay a little more
attention to your legally available hours, and you communicate any problems
immediately, so that CSRs can do what they do.

One thing that could happen is that the trailer could be taken from you, and
assigned to a different driver who isn't having a problem with legally
available hours.
[https://en.wikipedia.org/wiki/Hours_of_service](https://en.wikipedia.org/wiki/Hours_of_service)

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cs702
We entered this crisis with record levels of household, corporate, and
government debt worldwide.

Quoting from a World Bank report warning about record global debt levels on
December 19, 2019 -- three months before the lock-downs:

 _> The global economy has experienced four waves of debt accumulation over
the past fifty years. The first three debt waves ended with financial crises
in many emerging and developing economies. The latest, since 2010, has already
witnessed the largest, fastest and most broad-based increase in debt in these
economies. Their total debt has risen by 54 percentage points of GDP to a
historic peak of almost 170 percent of GDP in 2018. Current low interest rates
mitigate some of the risks associated with high debt. However, emerging and
developing economies are also confronted by weak growth prospects, mounting
vulnerabilities, and elevated global risks._

Source: [https://www.worldbank.org/en/research/publication/waves-
of-d...](https://www.worldbank.org/en/research/publication/waves-of-debt)

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sddfd
The western economic system cannot deal with lockdowns, and more generally,
any kind of stop-the-world scenarios.

What will be most important now is how the west will be able to deal with this
crisis in comparison to China.

If the Chinese system is able to deal with the crisis more effectively in
economic terms, this may put the western system as a whole in jeopardy, in
particular values like freedom and privacy.

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throwaway_pdp09
A very good point (and I'm not a china shill). China's philosophy is The State
Above The Individual, so it is willing to trade off a many more deaths, in
theory. The west is The Individual Above The State (or at least to a much
greater degree), so in theory we should do worse.

However the west has imposed large scale quarantines so the collective is in
fact valued (because most people understand them paying a some cost will
benefit others).

Also china is not an ant's nest, and the government can't go mad or their
government will become unstable and even overthrowm.

We're not so totally far apart. I don't know. My feeling in good times the
west does better, in hard times authoritarianism does better. We're in a hard
time. Things will change. Also china and the west are entangled economically
(so you can't examine each in isolation), so if the west does worse, china
suffers economically. Also china's allegedly been misusing cash - the tide's
going out, who's (more) naked? It's a good question.

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Taniwha
But that's not what we've seen is it, China has worked hard to minimize the
number deaths by going really hard on a heavy lockdown early, while the US
with 1/4 the population has dithered and not really mobilized the resources of
its state and has 24 times as many people die as China has.

I think it's more that modern China has been prepared to do everything it can
to minimize death in this case and by doing a serious lockdown along with
serious contact tracing they've come out early and are able to reopen their
economy

Some countries in the West have done the same and are in a similar state.
Others have fiddled why their countries have burned.

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0xy
>has 24 times as many people die as China has

This is predicated on the CCP numbers being accurate, which according to
multiple intelligence sources is false. [1]

They also made systematic attempts to withhold information from the WHO. [2]

[1] [https://www.bloomberg.com/news/articles/2020-04-01/china-
con...](https://www.bloomberg.com/news/articles/2020-04-01/china-concealed-
extent-of-virus-outbreak-u-s-intelligence-says)

[2] [https://www.theguardian.com/world/2020/jun/02/china-
withheld...](https://www.theguardian.com/world/2020/jun/02/china-withheld-
data-coronavirus-world-health-organization-recordings-reveal)

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scarmig
I wouldn't put too much stock in their exact numbers, but it's not realistic
to think that China has had 24 or 12 or even 6 times as many deaths as
publicly reported, let alone on a per capita basis.

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ac29
China has 18.7% of the world's population and 0.00018% of the current
coronavirus cases [0], if you believe their reported numbers. So yes, I'm
willing to believe there are vastly more deaths than reported as well.

[0]
[https://www.worldometers.info/coronavirus/#countries](https://www.worldometers.info/coronavirus/#countries)

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LatteLazy
It's interesting to see the fund industry angling for a share of the coming
bailout ("we can help with recapitalisation). Tier one banks have made a lot
of money managing TARP etc. This would be a nice new revenue stream for
companies with razor thin margins. And it would give them (and hopefully their
customers) more representation in the rooms these decisions are made in...

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kqvamxurcagg
This is exactly what is happening. The fund management industry is encouraging
and attempting to get their slice of the next bailout funds.

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acd
I do not understand why central banks are allowed to print money at low/close
to zero interest rate. This will build up some kind of future subprime bubble
where all the created cheap debt cannot be paid back. Central banks step in
and save the financial system, more finance regulation is put in place but
nothing is really solved. As an engineer working within operations, I cannot
understand this as the root cause too much debt which cannot be paid back is
not solved. Neither is the current economic system compatible with the
environment. Common things we share like clean air and water and environment
resources are not priced. You can profit from not being nice to the
environment yet you do not pay for that profit.

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aszantu
what consequences would that have for the lower and low middle class?

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merricksb
Archive.md paywall bypass link:

[http://archive.md/j2kcI](http://archive.md/j2kcI)

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igravious
“In less than three months time, the Fed has done everything it did under QE1,
plus everything it did under QE2, plus half of what it did under QE3!“

[https://seekingalpha.com/article/4349214-fed-is-
dead](https://seekingalpha.com/article/4349214-fed-is-dead)

How can there be a global corporate solvency crisis given the amount of money
flowing from central bank spigots?

Unless, of course, corporations have used the very cheap interests rates of
the last decade or so to buy back there own shares, which is great for
shareholders but terrible for the economy at large.

[https://www.visualcapitalist.com/stock-buybacks-
explained/](https://www.visualcapitalist.com/stock-buybacks-explained/)

So the stock market is going gang busters but many global corps are swimming
in debt.

Wonderful.

edit: caveat – this obviously is a fairly simplistic caricature of the
financial picture, but it's not entirely inaccurate!

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happytiger
The issue is that liquidity — the ability to meet short term obligations — and
solvency — the ability of a corporation to meet long term obligations are not
the same thing.

The fed has provided lots of liquidity. The crisis is in the “zombie
corporation” question: the solvency.

