Beware the 'mother of all credit bubbles'

[deminks]

https://www.washingtonpost.com/business/economy/beware-the-mother-of-all-credit-bubbles/2018/06/08/940f467c-69af-11e8-9e38-24e693b38637_story.html?utm_term=.0c9f4ad38126

Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the ­debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession.

Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.

Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.

Corporate executives and directors are apparently bereft of ideas and the confidence to make long-term investments. Rather than using record profits, and record amounts of borrowed money, to invest in new plants and equipment, develop new products, improve service, lower prices or raise the wages and skills of their employees, they are “returning” that money to shareholders. Corporate America, in effect, has transformed itself into one giant leveraged buyout.

(snip)

It’s hard to say what will cause this giant credit bubble to finally pop. A Turkish lira crisis. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.

(end snip)

[empedocles]

1. The most immediate of the bubbles

corp execs very inclined to sell into downturns unhealthy, volatile bubble

[appalachiablue]

2. And watch deregulation in finance. SEE: History

https://en.wikipedia.org/wiki/Panic_of_1893

http://teachinghistory.org/history-content/website-reviews/23842

[3Hotdogs]

3. Then you get shit-hook vultures like Bain Capital using cheap loans to buy companies.

They then float bonds and use those proceeds to pay themselves high salaries. The bought companies then go bankrupt.

Toys-R-Us.

[SWBTATTReg]

4. These actions such as rebating as dividends are artificially inflating stock prices w/o the

corresponding increase in per share earnings from actual sales, not one time things, apparently markets agree w/ this sentiment, they haven't gone gaga over these tax cuts and buy backs.

Kind of a gotcha thing, if you leave too much cash on the books, then you are a possible takeover candidate for some other company to swoop in and buy out the company to access the cash (like pensions and the like before). I wonder how many of these companies will fully fund their pensions now? Perhaps some of these companies will get out of leases and purchase facilities outright? Point is, there are lots of ways to use the extra cash (we all know this) and also know this, everybody in the market has extra cash all of a sudden, not just one company w/ a windfall, all of them have it, so prices amid competing companies for assets w/ this extra cash will dribble away faster.

Putting the money in a CD is not very attractive either (we all know this). Perhaps paying more debt down is an attractive offer, but you can write this debt off as a cost of business, unless your debt load to assets is too high, so this would be attractive, but then puts your company at risk too for a buyout by another company.

So if anything, these things have simply brought the issues of running a company more to the forefront, and also, placed a lot of these companies in the danger zone if they are not careful w/ how they handle this extra cash. It will take a couple of years or so for full impact of this new tax law to be fully felt, and unfortunately I don't see a lot of these companies passing along to employees these savings. This is a danger too, in that the economy is pretty well fully employed, and w/ the current pressure of the rump admin. on immigrants, I don't see the labor force increasing in size in any significant way. So, if businesses skimp on paying employees more, I see more employees jumping ship to go to other places that are paying more to employees.

Oh well. I am just glad I don't do books or audits anymore. It's getting too crazy out there, and drives one nuts.

[Hortensis]

5. They know Tax Heist economics mean national disaster.

This reminds me of the big auto execs who saw their industry heading for a cliff and instead of braking and reforming (anyone who suggested it was tossed off) rode their gravy train to the end.