Will the economy continue to float on a sea of debt through the election? Probably. From David Stockman at internationalman.com:
International Man: Bill Clinton’s infamous phrase during the 1992 presidential election was “It’s the economy, stupid.” How important of a role do you think the economy and a continued rally in the stock market will play in the outcome of the presidential election?
David Stockman: Well, in the befuddled mind of Donald Trump, probably a considerable role as manifest in his campaign oratory. And since there are less than 50 days left, he might get away with his groundless boasting. That is, we seriously doubt that the great reckoning will commence before November 3, meaning that he will keep peddling the “but for COVID” canard, claiming that, before that, he single-handedly created the Greatest Economy Ever.
Actually, it’s the greatest BS story ever told. It rests on the utterly misleading circumstance that the Donald entered office in month #90 of what became the longest business cycle expansion in history (at 128 months in February).
Consequently, his “record” was artificially flattered by the low U-3 unemployment rates (3.5%) that naturally occur during the last 38 months of the cycle as the inventory of unused labor is finally exhausted. Of course, that’s also exactly what occurred during the final months of the 118-month expansion of the 1990s and the 106-month expansion of the 1960s, when Democrats happened to be incumbent in the Oval Office.
But when measured by something relevant, such as the average real GDP growth rate during his tenure, it turns out that the Donald’s cherished “score” is the very worst among all the presidential terms since 1948.
Just in case you’re keeping score, here’s the latest on debt. From Wolf Richter at wolfstreet.com:
US National Debt Spiked by $1 trillion in 5 weeks to $26 trillion. Fed monetized 65%. Business debts spike to high heaven.
Trillions are now whooshing by at a breath-taking pace. The US gross national debt – the total of all Treasury securities outstanding – jumped by $1 trillion over the past five weeks, from May 4 through June 8, and by $2.5 trillion for the 11 weeks since March 23.
The total US national debt outstanding has reached $26 trillion, according to the Treasury Department. I’ve been fretting about this debt on my site since 2011. In recent years, I innocently added a green upward arrow with “Debt out the wazoo” to my gross-national-debt charts, unaware that this tongue-in-cheek label would turn into a factual, data-based technical term:
And think about this: The huge mountain of debt that took decades to grow to this gargantuan size has exploded by another 10% in just 11 weeks.
Nothing destroys the resilience of either a business or an economy like debt. There is no way, given present global debt levels, that the economy is going to bounce back from the hit administered by the coronavirus response. From Peter Schiff at schiffgold.com:
There seems to be mounting optimism that the US economy will rebound relatively quickly as states begin opening up and there is progress toward a coronavirus vaccine. But the optimism ignores deep problems in the US economy that existed before the pandemic – chief among them staggering levels of debt and the proliferation of zombie companies.
In the last couple of years, corporate debt has blown through the roof. So much so that the Federal Reserve issued warnings about the increasing levels of corporate indebtedness late last year.
Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.”
The government shutdowns in response to COVID-19 have only exacerbated the problem. The Federal Reserve’s prescription has been to encourage even more borrowing. Companies have obliged. As Bloomberg recently reported, “many of the companies hardest hit by the coronavirus outbreak have priced billions of dollars of bonds and loans in recent weeks.”
Never mind that profits have been wiped out, and that their business operations aren’t viable right now or likely anytime soon. As long as they’re propped up by the Fed, investors are willing to lend.”
Boeing wouldn’t be in the fix it’s in if it had spent more money on plane design and less on share buybacks. From Wolf Richter at wolfstreet.com:
Having become a master of financial engineering instead of aircraft engineering.
The first thing to know about Boeing’s mad scramble to line up “$10 billion or more” in new funding via a loan from a consortium of banks, on top of the $9.5 billion credit-line it obtained in October last year – efforts to somehow get through its cash-flow nightmare caused by the 737 MAX fiasco – is that the company blew, wasted, and incinerated $43.4 billion to buy back its own shares since June 2013, having become a master of financial engineering instead of aircraft engineering.
If Boeing had focused on its business – such as designing a new plane instead of doctoring an ancient design to save money and time – and if it hadn’t blown $43 billion on share-buybacks but had invested this money in a new design, those two crashes wouldn’t have occurred, and it wouldn’t have to beg for cash now. The chart below shows the cumulative share-buybacks in billions of dollars since Q1 2009. In Q2 2019, it belatedly halted the share buybacks (share buyback data from YCharts):
Corporate stock buybacks are management enrichment devices that are nothing more than speculation, often with borrowed money. What could go wrong? From William Lazonick, Mustafa Erdem Sakinç and Matt Hopkins at hbr.org:
Even as the United States continues to experience its longest economic expansion since World War II, concern is growing that soaring corporate debt will make the economy susceptible to a contraction that could get out of control. The root cause of this concern is the trillions of dollars that major U.S. corporations have spent on open-market repurchases — aka “stock buybacks” — since the financial crisis a decade ago. In 2018 alone, with corporate profits bolstered by the Tax Cuts and Jobs Act of 2017, 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. The $370 billion in repurchases which these companies did in the first half of 2019 is on pace for total annual buybacks that are second only to 2018. When companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.
Making matters worse, the proportion of buybacks funded by corporate bonds reached as high as 30% in both 2016 and 2017, according to JPMorgan Chase. The International Monetary Fund’s Global Financial Stability Report, issued in October, highlights “debt-funded payouts” as a form of financial risk-taking by U.S. companies that “can considerably weaken a firm’s credit quality.”
Rising interest rates and rising credit downgrades pose twin threats to the corporate debt market. From Claudio Grass at lewrockwell.com:
While I have reportedly highlighted the many risks of the current monetary policy direction and the multiple distortions that it has created in the markets, in the economy, and even in society, one of the most pressing dangers of the unnaturally low rates and cheap money is the staggering accumulation of debt. Nowhere is this more obvious than in the ballooning corporate debt, especially in the US. It has been growing so rapidly and for so long, that many investors and analysts eventually got used to it, accepted it as a fact of life, and became desensitized to the immense risk it poses to the economy at large. Now, another crucial milestone has been reached and a red line has been crossed, that will hopefully force market participants to finally heed the many calls for caution and the clear warnings that have been falling on deaf ears for years.
We are living through the greatest debt bubble in the history of the planet. Watch out below when it finally pops. From Michael Snyder at themostimportantnews.com:
We are facing a corporate debt bomb that is far, far greater than what we faced in 2008, and we are being warned that this “unexploded bomb” will “amplify everything” once the financial system starts melting down. Thanks to exceedingly low interest rates, over the last decade U.S. corporations have been able to go on the greatest corporate debt binge in history. It has been a tremendous “boom”, but it has also set the stage for a tremendous “bust”. Large corporations all over the country are now really struggling to deal with their colossal debt burdens, and defaults on the riskiest class of corporate debt are on pace to hit their highest level since 2008. Everyone can see that a major corporate debt disaster is looming, but nobody seems to know how to stop it.
A decade of historically low interest rates has allowed companies to sell record amounts of bonds to investors, sending total U.S. corporate debt to nearly $10 trillion, or a record 47% of the overall economy.
In recent weeks, the Federal Reserve, the International Monetary Fund and major institutional investors such as BlackRock and American Funds all have sounded the alarm about the mounting corporate obligations.
Fracking may be the greatest thing to ever happen to US oil and gas production, but it’s having a hard time paying for itself, especially when the cost of copious amounts of debt is thrown into the calculations. From Wolf Richter at wolfstreet.com:
Including billionaires who thought they’d picked the bottom in 2016.
In 2019 through third quarter, 32 oil and gas drillers have filed for bankruptcy, according to Haynes and Boone. Since the end of September, a gaggle of other oil and gas drillers have filed for bankruptcy, including last Monday, natural gas producer Approach Resources. This pushed the total number of bankruptcy filings of oil and gas drillers since the beginning of 2015 to over 200. Other drillers, such as Chesapeake Energy, are jostling for position at the filing counter.
Chesapeake has been burning cash ever since it started fracking. To feed its cash-burn machine, it has borrowed large amounts and has been buckling under its debt for years, selling assets to raise cash and keep drilling for another day. But its debt is still nearly $10 billion. Its shares [CHK] closed on Friday at 59 cents.
On November 5, in an SEC filing, it warned of its own demise unless oil and gas prices surge into the sky asap: “If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected which raises substantial doubt about our ability to continue as a going concern.”
$255 trillion is just the stated, nominal debt, and doesn’t include unfunded liabilities, contingent liabilities, or derivatives. From Tyler Durden at zerohedge.com:
There are three certainties in life: death, taxes and that global debt will keep rising in perpetuity.
Addressing the third, yesterday the Institute of International Finance reported that global debt has now hit $250 trillion and is expected to hit a record $255 trillion at the end of 2019, up $12 trillion from $243 trillion at the end of 2018, and nearly $32,500 for each of the 7.7 billion people on planet.
“With few signs of slowdown in the pace of debt accumulation, we estimate that global debt will surpass $255 trillion this year,” the IIF said in the report.
I’m not going to call it “tech,” because most of the startups in that so-called tech space aren’t tech companies. They’re companies in mundane businesses. And many of these companies aren’t startups anymore but mature companies that have been in business for over a decade and now have tens of thousands of employees. And then there is the entire shale-oil and gas space that has turned the US into the largest oil and gas producer in the world.
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