
A $9T corporate debt bomb is 'bubbling' in the US economy - paulpauper
https://www.cnbc.com/2018/11/21/theres-a-9-trillion-corporate-debt-bomb-bubbling-in-the-us-economy.html
======
apo
_Over the past decade, companies have taken advantage of low rates both to
grow their businesses and reward shareholders.

Total corporate debt has swelled from nearly $4.9 trillion in 2007 as the
Great Recession was just starting to break out to nearly $9.1 trillion halfway
through 2018, quietly surging 86 percent, according to Securities Industry and
Financial Markets Association data. Other than a few hiccups and some fairly
substantial turbulence in the energy sector in late-2015 and 2016, the market
has performed well._

"Reward shareholders" is code for stock buybacks - the practice of a company
using ultra-low interest financing to buy its own stock on margin. It's an
unsustainable way to manipulate the price/earnings ratio, and thereby make a
company look like a better buy than it is.

Buybacks in turn have been a major source of funding for the stock market's
unprecedented run:

[https://seekingalpha.com/article/4156578-buyback-bubble-
will...](https://seekingalpha.com/article/4156578-buyback-bubble-will-end-
badly)

I suspect those looking for a soft landing here haven't considered the
reversible nature of this debt-fueled stock market rally. Nor have they
considered the amplifying effect of debt on the upside and downside.

~~~
freehunter
I keep an eye on a lot of tech stocks, and I think it's crazy how much crap
companies like IBM and Oracle got 3-5 years ago for their stock buybacks [1]
contrasted to how praised stock buybacks are now [2]. The impact back then was
the market was great but IBM/Oracle/etc's share prices weren't doing great.
The impact now is the market is _not_ doing great, and stock buybacks are a
band-aid over the inevitable decline.

Anyone who doesn't see that is going to be caught off guard when the money
runs out, the buybacks stop, and the market crashes "overnight". In reality,
the market is crashing _right now_ , it's just hidden behind trickery designed
to artificially inflate the value of the market. It's like if I lost my job
but kept financing my same lifestyle out of my savings account. Eventually
that savings will run out and reality will hit like a ton of bricks, and no
one will have seen it coming.

[1] [https://www.fool.com/investing/general/2014/12/05/share-
buyb...](https://www.fool.com/investing/general/2014/12/05/share-buybacks-are-
killing-ibm.aspx)

[2] [https://www.fool.com/investing/2018/12/09/why-investors-
shou...](https://www.fool.com/investing/2018/12/09/why-investors-should-cheer-
facebooks-stock-buyback.aspx)

~~~
pmart123
Companies with low growth have a few options (assuming strong cash flow).

1\. Distribute cash back to shareholders via buybacks or dividends

2\. Increase R&D spending on new initiatives

3\. Acquisitions

Buybacks are at least much more tax effective than issuing dividends. Large
acquisitions tend to fail and I imagine it could be hard for an established
company to regain the "growth mindset" of a startup.

Should a company load up on debt or pursue buybacks way above intrinsic value?
Probably not. But, if a company is paying a 4% dividend, and can borrow at
3.5%, buying back stock reduces the dividend payout, and the company avoids
lowering the dividend per share (something that is considered sacrilegious in
America).

~~~
tboyd47
Why does a company have to grow, if it's doing what it does well, workers are
happy, and customers are happy, and growth is not occurring naturally?

Could it be that the expectation for all companies, everywhere to grow at a
constant rate is not reasonable?

~~~
pmart123
I get your rationale, but you have to remember that this hypothetical company
would probably generate a fair amount of cash. The question then becomes, what
do they do with that cash? Say a company has a steady state $10B revenue, $2B
profit and requires $1B of reinvestment capital with a market cap of $20B.
After 5 years, the market cap becomes $25B all things being equal due to an
additional $5B of cash on the books. Eventually, the company's value would
start to be primarily cash. In a low interest rate environment, it could be
hard for this company to make money on this cash, and investors are probably
more interested in the company executing its mainlines of business versus
turning into a hedge fund to manage of huge cash position. A stock buyback is
one way this company could "grow" in revenue and earnings per share, but not
have to try and grow top line revenue.

~~~
tboyd47
I guess I don't understand the mindset in which having extra cash is some sort
of problem to solve. Apple, Microsoft, Cisco, Oracle, Qualcomm, etc. all have
large stockpiles of cash and no one thinks of them as hedge funds, right?

~~~
pmart123
Apple actually does have a quasi hedge fund to manage its cash position:

[https://qz.com/393093/the-mysterious-fund-in-the-desert-
that...](https://qz.com/393093/the-mysterious-fund-in-the-desert-that-manages-
apples-cash/)

Too much cash can also lead to behavioral finance issues down the road as well
such as companies making ill-fated acquisitions such as Microsoft did under
Ballmer's helm.

~~~
tboyd47
Excuse me if this sounds tongue-in-cheek, but is "behavioral finance issues"
another way to say that the people placed in charge of the large pile of cash
can't be trusted with it? Are you saying the solution to that is to just not
to hold any cash?

------
mathattack
The market cap from US companies has grown from 19 to 32 trillion in the same
period. [0]

It’s not accurate to look at single variables in isolation. Problems happen
when the aggregate debt in an economy exceed the assets behind them, or the
capacity to pay them down. [1] If we are there it’s because of govt and
consumer (mortgage) debt. On the corporate side I think it’s just balance
sheet efficiency. (Can write off debt payments)

[0]
[https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?start=20...](https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?start=2007)

[1]
[https://en.m.wikipedia.org/wiki/Minsky_moment](https://en.m.wikipedia.org/wiki/Minsky_moment)

~~~
Novashi
Of course another variable is whether there will be another bailout if this
goes off.

~~~
lotsofpulp
Considering how many wealthy (and not so wealthy) voters are invested in large
public corporations, I assume bailouts will happen.

------
aphextron
I've come to realize that debt (at the macro level) really doesn't matter at
all in our system. In fact higher levels are better because it means people
are doing business. It's a completely different thing than personal debt. The
direct cause of the depth and breadth of the Great Depression was seeing money
as a "thing" that actually exists and must be conserved, rather than the fed
QE policies of Bernanke, which saved us during the Great Recession. If anyone
can point to a place where a sovereign democracy with reserve currency status
ever went bankrupt or suffered ill effects from too much debt, I'd like to see
how that worked.

~~~
BenoitEssiambre
It's not that debt doesn't matter. It does. But at the macro level, it works
in counter intuitive ways mostly because of the fact that every dollar of debt
is someone else's saving (the person the debt is owed to). If you reduce debt
by $1T you necessarily reduce savings by $1T. Whether this is good or bad
depends on finer details that are rarely discussed in internet forums and that
seem only to be fully grasped by the best economists.

~~~
dogcomplex
I don't suppose you could give us a detailed example of some particular
company's/country's debt situation? (Just, since it's rare to find people who
can explain that depth)

~~~
BenoitEssiambre
Well, I'm not an economist and a detailed example would be a lot of work. But
here are some points to consider:

\- Aggregate financial liability is the flip side of aggregate financial
assets. Net financial savings/debt is zero for the economy as a whole. Because
of this, looking at particular companies or sectors is very different than
looking at the economy as a whole.

\- When looking at entire countries especially large ones, there are important
aggregate effects so depending on what you are trying to understand, it often
makes sense to take an aggregate perspective where this net savings/debt are
zero (ignore international imbalances, cross country debt etc. ) .

\- Debt is usually denominated in a currency, government debt is particularly
intertwined with the behavior of its currency, so it makes sense to take into
account central bank regimes, the effect of inflation etc.

-When taking the aggregate, whole economy perspective where net financial assets net to zero, it's important to keep some focus on the non financial assets that makes up the residual non-zero net positive. This is the stock of economic capital: physical intrinsically valuable forms of wealth such as inventory, stockpiles, infrastructure, factories, machinery, tools, knowledge, land, natural resources, production capacity, energy, technological advancement etc... The financial assets, the debt, is just indirect claims on this capital and on the future production you might get from it.

-Since economy wide financial crises are about claims on things, about coupons, about promises that net to zero, they can pretty much always be resolved smoothly through sufficient central banks accommodation that, through inflation, readjust the real value of all these claims to be in line with what is actually reasonably redeemable in a timely manner. However, this can result in some unfair redistribution or painfully high inflation (It's still much less unfair, and much much less painful than widespread defaults and gridlock in the investment and labor markets).

-Central banks are often not competent enough to maintain stability and readjust properly. I don't know what can be done about that. The ECB's performance for example, has been pathetic. It was so procyclical as to almost bring down western civilization IMO, emboldening foes such as Russia and China and utterly destroying Greece and Italy, those poor Europeans. The US Fed has also been somewhat bad, failing to hit its inflation target for years after the financial crisis, a time when it should have been overshooting a little, but has recently been doing better. On the flip side, the Canadian central bank was great during the financial crisis, and saved Canada from a large part of the downsides. Marc Carney who was heading the Bank of Canada, then moved to head the UK's Bank of England and saved the British from Brexit turning into a massive disaster that brought unemployment in the tens or twenties of percents. However, the UKs proximity to the eurozone resulted on some splash damage from the ECB. Australia's money supply has been competently managed. Japan was horrible in the 90s but has been doing better in the last decade. BTW Japan is an interesting case to look at from a debt perspective because its government has by far the highest level of debt per capita.

-The assumption that savings must always have positive real returns, that interest rates must be positive, is one of the most weirdly persistent fallacy in economic debates. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century. There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.

------
paulpauper
_There 's one worrying trend where companies on the edge of the investment-
grade universe lose their standing and turn into high-yield or junk, sending
rates — and defaults — significantly higher. And there's a more positive case
where the U.S. continues to outperform the rest of the world and corporate
debt problems are limited to overseas and specific companies that aren't
systemically important._

My money is literally on the optimistic outcome. Just check old headless from
2009-2017 of all the failed predictions of crisis. Odds are nothing will
happen. Profit margins for multinationals are at historic highs. Bondholders
of investment-grade debt should have little to fear. Junk debt however is
riskier obviously and would avoid it.

~~~
moorhosj
==Just check old headless from 2009-2017 of all the failed predictions of
crisis.==

You could just as easily check the old headlines from 2006-2008 that told us
we were in a "Goldilocks" economy and would live in an endless bull market.

~~~
paulpauper
but there are far more failed predictions of crisis than failed predictions of
prosperity and growth. A broken clock is right...

~~~
moorhosj
Yes, corrections have historically happened far less frequently than growth
periods. Unfortunately, they tend to have much greater impact on people's
livelihood as they come fast and hard.

------
known
The financial position of the United States includes assets of at least $269.6
trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce
a net worth of at least $123.8 trillion (723% of GDP)[a] as of Q1 2014.

[https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...](https://en.wikipedia.org/wiki/Financial_position_of_the_United_States)

------
gammateam
Corporate bonds mature and the principle is paid back. Unlike publicly traded
stock, the bond asset never has to be sold on the open market to get rid of it
so this part isnt a concern.

If there is a threat that the corporation cannot pay back, or if the
corporation merely feels like it, they will issue new bonds and use the
proceeds to pay back old ones. Yes it is exactly what it sounds like and there
is enough investor appetite for it.

When the corporation’s bond offerings are no longer investment grade then
there is less of a chance of their being investor appetite for a future bond
rollover and the corporation should try to pay the existing bond.

Therefore the SIZE of the corporate debt outstanding is only clickbait.

This article talks about how there are signs that some companies historically
wouldnt be able to tap into bond investor appetite to issue new bonds to cover
their cash shortfalls on current bonds. Investor appetite may still be there
or the company puts more resources into paying back current bonds in full
before they mature, YEARS from now.

Notably this article didnt talk about maturity dates.

------
roymurdock
here's a much better article on the subject of corporate debt [1]

basically the total amount of corporate debt has jumped, but corporate debt
defaults have also decreased sharply

aka corporate debt has become safer, and investors are buying it up because it
has been relatively safe and provided attractive returns

if interest rates begin to rise, corporate debt defaults could start
increasing, potentially severely. mass defaults could trigger another crisis

"New McKinsey Global Institute research finds that one-quarter of corporate
bonds in Brazil, China, and India are from companies that are already at
higher risk of default even at today’s low interest rates.

If interest rates were to rise by 200 basis points [2%], that share could rise
to as much as 40 per cent. In advanced economies, most corporate borrowers are
in good financial shape, but there are pockets of acute vulnerability, for
instance, among speculative-grade borrowers, and in certain sectors like
energy and retail...

Is the next global financial crisis at hand? We do not think so. Unlike the
subprime mortgages that sparked the previous financial crisis, defaults in the
corporate bond market are unlikely to have significant ripple effects across
the system.

While mortgages were packaged into securitised assets and multiple layers of
synthetic securities were built upon them, the same is not true of corporate
bonds. Losses will therefore be sustained by the direct bond owners, but the
systemic risks seen in the previous crisis are minimal."

i agree, and a 2% increase in interest rates doesn't seem anywhere near
possible with today's current combination of low productivity growth, low
global capital demand, and easy liquidity (granted QE is starting to wrap up
in the EU at least and the US is toying with the idea of raising rates against
Trump's will)

of course this is a McKinsey economist/investment manager somewhat talking
their book, so draw your own conclusions, but the FT article on the state of
the corporate debt is much more well-researched and written

PS subscribe to and read the FT, you won't regret it. this CNBC coverage is
complete garbage

[1]
[https://www.ft.com/content/bc1d327a-91c1-11e8-bb8f-a6a2f7bca...](https://www.ft.com/content/bc1d327a-91c1-11e8-bb8f-a6a2f7bca546)

~~~
talltimtom
> are unlikely to have significant ripple effects across the system.

Was said about the mortgages too.

------
unethical_ban
Do bombs bubble?

Why not "bubble is growing"?

"Volcano is bubbling"?

"Bomb is ticking"?

~~~
mattmar96
Bubble is a commonly used term in financial circles

[https://en.wikipedia.org/wiki/Tulip_mania](https://en.wikipedia.org/wiki/Tulip_mania)

~~~
unethical_ban
I mean, yeah, but then it's not a bomb.

My comment is lighthearted - I'm just saying they mixed metaphors.

------
carapace
Economics is ecology + psychology.

------
time-domain0
Sorry, but it's a doomsayer, tinfoil hatters' failure to understand MMT.
Here's one of Bernie Sanders' economic advisers explaining it:

[https://youtu.be/5baKgv7Zl5g](https://youtu.be/5baKgv7Zl5g)

[http://www.usdebtclock.org](http://www.usdebtclock.org)

~~~
jasode
_> , tinfoil hatters' failure to understand MMT._

I wasn't the one who downvoted you but as a fyi... this particular article is
about _corporate_ debt. MMT is about _government_ debt.

When _non_ -government entities such as businesses and consumers take on too
much debt that they can't service, bad economic things happen.

~~~
time-domain0
Obviously, Sherlock. The govt with the Fed are (or should be, if things don't
spiral out of control) the economic governors. You can't talk about either one
in isolation because they are symbiotic, not mythologically-utopian,
hermetically-closed model boxes that can exist without the other.

The Fed will be pressured to reduce interest rates because corporations are
playing Russian roulette too-big-to-fail brinksmanship and will expect a
bailout as per usual.. an action the majority undertake will always be excused
in a democracy because of political pressure.

~~~
ilikeatari
But can we be kinder to each-other in these discussions?

------
jondubois
I am eagerly awaiting the next bubble. I hope it will be the worst since the
great depression. I will probably lose my job but that's OK - It will be worth
it; all the bankrupt corporations and the jailed executives will need
replacements which means more opportunities for everyone else.

~~~
Sileni
Did you sleep through 2008? Only poor people experience recessions now.
Corporations put up record profits.

------
jaxtellerSoA
Debt with interest is inherently destructive. Inevitably the demand for debt
owed exceeds the actually supply of money. To put it in very simple tangible
terms, if the US economy was say $100,000, and say all that money is lent out
at a simple 10% interest rate due back in one year, then a year from now the
demand to be paid back is $110,000. Where is that extra $10k coming from? It
doesn't exist. Lending with interest is designed to fail. The only "solution"
is to keep printing more money.

~~~
manishsharan
I think you are implying the companies and people borrow money for shits and
giggles. The reality is that most companies borrow money only when the
availability of extra capital would help them generate more revenues or
capture addtional market share. So they would take into account the cost of
servicing the debt and repaying the loan.

However, there are cases like IBM raing debt to buy back shares and boost
share prices. I have no idea how that will work out for them.

~~~
jaxtellerSoA
>I think you are implying the companies and people borrow money for shits and
giggles.

Nope. I was just using an example. It could have been $100k and only $50K was
lent out. You sill would need $105k at the end of the year to satisfy all
debts and have an equilibrium within the economy. Where is the extra $5K
coming from? Magic??

> The reality is that most companies borrow money only when the availability
> of extra capital would help them generate more revenues or capture
> additional market share.

This doesn't change the fact that the demand back for money will exceed the
actually money supply.

It is simple math really. The fact that they are using the cash to, hopefully,
generate more revenues is irrelevant.

Private companies have no control over the the supply of money. This is a
central banking problem.

~~~
kryogen1c
>You sill would need $105k at the end of the year to satisfy all debts and
have an equilibrium withing the economy. Where is the extra $5K coming from?
Magic??

this makes very little sense. You are not lending the entire economy and then
demanding more than the economy be paid back. You only lend a portion of the
money supply so that a slightly larger portion is repaid.

Even if that were the case, isnt that what QE does?

~~~
jaxtellerSoA
>You are not lending the entire economy and then demanding more than the
economy be paid back.

You are right that you are not lending the entire economy, I was just making
the example as simple as possible. But, the second interest is being charged
then the demand of money back exceeds the actual money supply. What companies
and investors do to increase revue for 1 particular organization has no effect
on the money supply. All companies are doing are vying to try and redistribute
the money that already exists in their favor, they aren't creating money (if
they are that is called counterfeiting and is illegal).

> Even if that were the case, isn't that what QE does?

Yes, QE increases the money supply. I am not saying that the money supply
doesn't get increased (by the Federal Reserve), merely pointing out the fact
that once you get on this treadmill it just goes faster and faster and faster,
and there is no way to get off without a disaster (bubble).

~~~
zaroth
Jax, I’m sorry but this is just fundamentally incorrect. The economy is not a
zero sum game. Clearly there is annual economic growth, and that growth
compounded over many years has lead to orders of magnitude growth in the size
of the US/World economy.

Companies borrow money in order to invest in their own growth. Borrowing
allows increased growth rate and in turn increased spending which has follow-
on effects downstream (this is called the money multiple).

I very much enjoyed taking the intro Micro and Macroeconomics classes as part
of my Econ degree. There are probably even great courses online for free now.
I’d highly recommend it.

