Tag Archives: balance sheets

The Great Unwind II, by Alasdair Macleod

Posted on November 4, 2022 | Leave a comment

To stay solvent banks are going to have to dramatically curtail lending. Shrinking credit and central bank debt monetization will drive the world into an inflationary depression. From Alasdair Macleod at goldmoney.com:

With price inflation rising out of control and interest rates rising strongly, the trading environment for commercial banks has fundamentally changed. With bad debts looming and bond prices in entrenched downtrends, procrastination is now the enemy of bankers.

We are at the beginning of The Great Unwind, and this article elaborates on my first article for Goldmoney on the subject published here. 

The imperative for bankers to respond to these conditions overrides all other matters if their businesses are to survive these changed conditions. We are entering a cyclical downdraft of the bank credit cycle which promises to be cataclysmic. And the monetary policy planners at the central banks can do nothing to stop it.

After outlining the scale of the problems faced by each global systemically important bank, this article looks at the future for the $600 trillion derivatives mountain. It was born out of the long-term decline in interest rates from the mid-eighties, which ended last year. It is almost entirely distributed through banks and shadow banks.

The question to address is, what is the future for the derivative mountain, now that the long-term trend for falling interest rates is over? And what are the economic consequences?

If it’s you in the hot seat…

Imagine, for a moment, that you are the CEO of a commercial bank involved in lending to businesses and with profit centres acting in a range of financial activities. As CEO, you are answerable to the board of directors for the bank’s performance, and ultimately the bank’s shareholders for maintaining and advancing the value of their shares. 

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Posted in Banking, Business, Currencies, Debt, Economics, Economy, Financial markets, Geopolitics, Governments

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Goldman Sachs Says Corporate America Has Quietly Re-levered, by Tracy Alloway

Posted on November 10, 2015 | 1 comment

It was only a year ago when mainstream analysts were chirping about how healthy corporate balance sheets were. They weren’t actually that healthy then, and they’ve deteriorated dramtically since. From Tracy Alloway at bloomberg.news:

One of the biggest post-financial crisis imbalances sits on corporate balance sheets, according to analysts at the bank.

You might choose to whisper it softly, but the balance sheets of U.S. companies are yelling it loudly, while wielding a baseball bat:

Corporate leverage is now at its highest level in a decade, according to a new analysis from Goldman Sachs.

Years of low interest rates and eager investors have encouraged Corporate America to go on a shopping spree. On its list are share buybacks and dividend hikes to reward equity investors, as well as a series of merger and acquisition deals, all funded through a generous bond market. Since cash flow has not kept up with the boom in bond sales, the splurge has left Corporate America with its highest debt load in about 10 years, according to the bank.

To continue reading: Goldman Sachs Says Corporate America Has Quietly Re-levered

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Corporate foie gras, by Eugen Von Bohm-Bawerk

Posted on September 7, 2015 | Leave a comment

From Eugen Von Bohm-Bawerk at bawerk.net:

One of the arguments put forth in the bull vs. bear debate is that the solidity of US non-financial corporations have never been stronger. The amount of cash held by non-financial corporations has risen 150 per cent since the depth of the crisis in 2009. With such a massive cushion to stave off whatever the market may throw at them, they will be able to cope, or so it is held.

In addition, we know that financial corporations are flush with cash, or excess reserves held at the Federal Reserve. Throughout the various quantitative easing (QE) programs conducted by the Federal Reserve, commercial banks have been force fed cash as ducks on a foie gras farm. This has swelled their excess reserves to the unprecedented, and what would be thought unimaginable only few years’ back, level of US$2.6 trillion.

With all this cash the system should be, again according to the perma-bulls, more than ready to withstand the shock from the ongoing global deleveraging, a stronger dollar, emerging market blow-ups and the forthcoming US recession.

We beg to differ. When it comes to excess reserves they are most likely already “spoken” as a form of collateral in shadow banking chains. While the initial effect from QE on the shadow banking system was massive deflationary shock as all the high quality securities used in re-hypothecated collateral chains were soaked up by the Federal Reserve, it is a safe bet that excess reserves has to some extend filled that void.

In the non-financial sector on the other hand cash is, well, plain old cash. With more than US$1 trillion of the stuff on their balance sheet complacency is destined to be prevalent. And it is.

Credit market instruments, id est. debt, have also risen at a tremendous rate. Net debt, that is credit market liabilities less cash, has actually never been higher. As the chart below shows, sitting at more than US$6.6 trillion, non-financial net debt outstrips even the high from 2008.

Now, if we express the gargantuan debt load as share of market value of non-financial equities outstanding things looks not only sustainable, but outright sound. At only 30 per cent the debt to equity ratio is at multiyear lows. We need to go all the way back to the peak of the dot-com folly to find today’s equal.

And it is exactly the folly of the dot-com (and went) that best epitomizes todays manic corporate debt issuance. According to Bloomberg more than US$2.7 trillion in stock buybacks has been effectuated over the last six years. We would be amiss if we didn’t mention that this spending spree, not on capital goods or R&D that will help propel future growth mind you, but on liability massaging, coincided with ZIRP.

Investors desperate for yield have more than happy to lend US Inc. trillions of dollars, even though it is used mainly to buy back own stock. Not surprisingly this also help goose the market value of equites outstanding; also known as the denominator in the ratio presented in our chart.

So more debt begets higher market value of equites which in turn improves the debt/equity ratio which gives the incentive to issue more debt ad infinitum. Or in a slightly simpler version, debt beget more debt.

We have seen the story before. In the shaded grey areas we highlight episodes when the virtuous relationship turns ferociously vicious. Remember, markets take the escalator up, but the elevator down. And the longer the escalator the further down the elevator goes.

To continue reading: Corporate foie gras

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