We hear a lot about how corporations are swimming in cash. But according to a new analysis from Standard & Poor’s, they’re drowning in even more debt!
Market Roundup
The latest figures show that …
- Total debt surged to a record $6.6 trillion last year among 2,000 nonfinancial firms tracked by S&P. That was an $850 billion increase in just 12 months.
- Yes, total cash also hit a record $1.84 trillion. But that represented an annual increase of just $17 billion, meaning debt grew 50 times as much as cash!
- As a result, American companies are now carrying cash equal to just 28% of their debts – the lowest since the tail end of the Great Recession.
Why do I focus so much on debt and the credit cycle? Because it holds the key to future stock market direction, whether Wall Street wants to admit it or not. I believe a huge wave of easy money worldwide funded the biggest, debt-fueled “Everything Bubble” between 2009 and mid-2015 in history, and that it’s now beginning to unwind.
[Read More – The Consequences of Reckless Lending – Mike Larson]
Defaults are already rising sharply in sectors like energy, and as a new report from Deutsche Bank stresses, that default wave won’t stay confined to commodity-focused companies. Energy sector defaults are running around 24% in the past year, but they’re also rising well into the mid-single-digits for consumer products, capital goods, and other industries.
So while the markets flop and chop around … and we see if S&P 2,040-2,060 turns into, say, S&P 1,840-1,860 … keep a wary eye on corporate credit quality. The indicators I’m seeing are far from encouraging.
Now, I’d love to hear what you think of S&P’s analysis. Should we be more worried about record corporate debt … or encouraged about record corporate cash? Are corporate defaults going to hound the stock market in 2016 and beyond? Or are they just another background annoyance that investors can safely file away? Let me hear about it here at the website.
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Auto dealers are out there flooding your inbox and mailbox with Memorial Day deals, and blanketing the airwaves with advertisements, too. But should you buy into that pitch? I guess it depends on whether you agree with my article from Friday about an unfolding auto-sector bust, which would argue for lower prices and better deals down the road.
Reader Jim said I was on target, writing: “I do expect the car market to crash. However, used cars will plummet in price, making it more affordable with fewer buyers of new cars. Also, I can see the auto parts companies more profitable as we drive our cars longer, and thus needing more repairs.”
Reader Thomas also sounded skeptical of the industry’s health, saying: “So the stats say we are looking at subprime motor vehicle debt. Wall Street will package these loans in bundles the same way that housing debts were converted into CDOs, and sell it into the markets.
“Who will create the similar credit default swaps and go ‘short’ on this bubble, and what will the leverage be? It’s déjà vu all over again with another bailout for the car manufacturers. They got it in 2008, why will they not get it again?”
Finally, Reader Jean said: “Investors will pile in wherever they can get returns, and subprime autos have become the latest venue for the Fed’s EZ money policy. This will cause a bubble in vehicle prices caused by EZ financing, similar to what we saw in the housing bubble.
“How many times do these games need to play out before the Fed realizes that doing the same thing over again and again and expecting different results is the definition of STUPID?”
But Reader Steve N. countered by saying: “I am not terribly worried about the ‘auto lending bubble disaster.’ After 2007, is it really possible all these washed-up, no-income-verification, real estate salesmen found a new area in which to be unethical? I think with interest rates so low, both auto manufacturers and consumers stretched to make more sales and purchases than might have been prudent.
“But what’s the backlash? A couple of years of repo inventory to work off? With wage and job growth still on the plus side, I don’t think this natural overindulgence merits the headline ‘Bubble Disaster.'”
And Reader Alfredo said: “I see this article more as an attempt to create a bearish exodus than anything else. Sure, there may be some issues with payments. But to claim that people are being put into cars they can’t afford because of leasing? That’s more than a bit of a stretch.
“I really hate this kind of propaganda. Car loans are not securitized and there is no bubble to burst there. Crises are created by bubbles, and as long as there isn’t one, no crash will happen. It isn’t like cars are going up in value anyway.”
Thanks for weighing in, whether you agree with me or not. I stand by my views, however. What has been happening in autos isn’t exactly the same as what happened in housing more than a decade ago. But it has enough similarities to make a credit-focused guy like me downright worried.
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
Please do keep the discussion going online. You’ll find the comment section below.
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 Bayer AG (BAYRY) is officially launching a bid to buy the genetically modified seed company Monsanto (MON) for $62 billion in cash, or $122 per share. But the German chemicals giant faced some skepticism from shareholders about the high price of the acquisition, and the amount of debt it would have to take on in order to finance the bid. Antitrust concerns could also scuttle the deal over time.
 The leader of the Taliban, Mullah Akhtar Muhammad Mansoor, was assassinated in a U.S. drone strike over the weekend. The attack occurred in a part of Pakistan that the U.S. hasn’t previously targeted, perhaps reflecting U.S. frustration with Pakistan’s efforts to rein in the Taliban insurgency.
 You can now ride a light rail train from Downtown Los Angeles all the way to Santa Monica on the Pacific Ocean. The mass transit expansion in a car-centric metropolitan area is just one of many underway, according to the Wall Street Journal, and could help relieve commuting stress while reducing pollution. The trade off? Higher taxes.
Do you think this Monsanto mega-merger will fly? Are you encouraged that another Taliban leader has been taken out? Any thoughts on the expansion of mass transit in cities like L.A.? Let me hear about it in the comment section below.
Until next time,
Mike Larson
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Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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“The borrower is the Servant of the lender” we read in the good Book! Let us look deeper and identify who the lenders are to see who is the new Masters of the money game. It is no surprise then to see that it is the same crown as was the case during the last recession! We can soon expect the same outcome then as well! Buckle-up, it is going to be a bumpy ride again!
Thomas,
I agree with your “the borrower is the servant” logic, but only up to a point.
If I lend you $50.00 I would like to get it back, and I am in charge. If I lend you $5,000.00, I still want it back, but now you are in charge.
Just having fun.
Jiggling the interest rate by the fed never solved the economy’s basic financial problems in the past and never will in the future.
I do not worry to much about what is going to happen as predicting and worry about predictions of others is a coin flip business that keeps financial writers employed. I just try to have as secure a job as possible, control my debt and keep enough of my net worth in cash as I can so I can bottom fish when it does fall out. It will fall but no one knows for sure when this will happen. Those that say it will get better are right and so are those who say it will get worse are also right. It is always a question of when for both results that is the rub. Do not stick your neck out further than you can pull it in without getting it chopped off on the way back to your shell.Will Rogers said ” Buy low, sell high, if it don’t go up don’t buy it.”
And in the last days there shall be great tribulation and the Whores of Babylon shall kill their children and sell the infant bodies to the human butchers. And men shall dress as women and mount each other in preference to whores. And the great nations on the earth shall ripen their populations for acceptance of all sorts of perversions even making acceptance of perversions into law. Such shall be lowly state of man at the end when the worlds financial system shall collapse under the heavy burden of corrupt and evil politicians who prostitute themselves and serve the earths lowest of Gods children.
And in those days were it not for the saving grace of the Lord, World War III would come and the earth would be scorched with fire that is hotter than the sun; a fire so hot that evil and good on the earth would parish together.
John’s paragraph will soon resemble “Breaking News” reports on CNN Headline News. It fairly states the current affairs here in the States and around the world.
It would be helpful, and actually useful, if the S&P report broke down total debt between productive debt and non-productive debt. Productive debt is not a great problem for an economy because it generates enough additional revenue to eventually retire the debt. What will eventually collapse an economy is excessive non-productive debt from floating bonds to fund stock by backs, or buying out your competition with cheep money to avoid R&D costs or wasteful use of capital. With this knowledge we could better determine the best strategy for future investing.
In my modest wisdom I see a large elephant with many bubbles around his head slowly backing up to the fan, while the bean counters and sheeple whistle Dixie.
And you know what happened to Dixie. ‘Destroyed by the power of Big Government in D.C.
Don’t get me started! Jim
Can mass transit work in the L.A area? Maybe, in some places The new Expo Line is a re make of the old Pacific Electric line of sometime ago.I believed it was mostly a single track used for freight . The street cars ran one in the mornings way to up town L.A.
Can mass transit work in the L.A area? Maybe, in some places The new Expo Line is a re make of the old Pacific Electric line of sometime ago.I believed it was mostly a single track used for freight . The street cars ran one way in the mornings and evenings. They should have left the old system in tact.L ook at the costs.
and yet, the talking heads tell us the Market is not high priced, as PEs ascend to 20 plus as the norm. Hold on, the rollercoaster is approaching the top of the track.
But the top of the track stretches far enough into the future that I may not see the downturn. I may be able to make a fortune in an expanding bubble and the house of cards will hold up until after I am gone.It is a zero sum game but the periods are too long.
In relation to the corporate debt being studied by the S&P, they should be concerned as the skull and bones of the 50 day moving average crossed over the 100 day. There were only 2 other times that this happened, 2008 and 2001 just before the market collapsed. I’m sure if I look back further it happened in previous recessions. It is only a matter of time now for this ponsy scheme to come to its end. One other comment, May 24th is the day that Deutsche Bank has some dirivatives and other “investments” that they have to pay out on. This is the day of the beginning of their failure, as the don’t have the capital to honour. If you own their shares, get out now. They will bring down the global banking sector by the weekend. I forecasted this months ago!! And I’m not an economist!!
Another disturbing trend is that much of that corporate Debt is going to Buybacks which makes earnings look better than they are and even worse some people at the top are getting there shares bought back at higher prices while they saddle there companies with Debt . THE REAL REASON THE MARKETS RECOVERED MUCH OF THE GAINS THAT THEY LOST IN JANUARY MAY BE THE INCREASED AMOUNT OF COMPANY SHARE BUYBACKS THAT OCCURED IN THE FIRST QUARTER OF THIS YEAR . i WONDER HOW MUCH LONGER THIS CAN LAST ?????
most of Americans know that one dollar today will be Worth LESS in 3, 6, 12 years like we could buy a dozen of eggs for 80 cents a few years ago now is like at least twice as much . . and the Crooked Cartel keeps printing TRILLIONS of USD every year even if they do not tell you . . . because they thing most Americans are stupid . . so they think . . . Inflation is going up but the cooked numbers says otherwise . . and the Most Basic things are going up every year .. but ” they do not count for inflation ” . . . . so keep in mind ELECT NON ESTABLISHMENT Evil Greedy CROOKS to run the country choose a Christian person that loves AMERICA more than their pockets and their EVIL GREEDY CROOKED MASTERS
,,,,Non Establishment candidates….. NOT Evil Greedy Crooks …
Ed
Any thoughts on Allen West as a possible Vice President for Trump ??? I know he was in Congress and I still think they stole the election from him although he was too much of a gentleman to contest it . His values seem to be concrete and real and his military back round would help trump in the foreign policy arena .
Vinman
I just bought 2 dozen eggs for 50 cents a dozen at Albertsons and a case of Van Camps pork and beans for 50 cents a can at Walmart. No coupons. Many food items are coming down slowly. Bread at Walmart is 50 cents on the day-old rack, sometimes less.
I read the above comments made by Steve N. and Alfredo. They seem to take a “do not worry stance” The big elephant in the room however is over extended credit on not only cars but everything. These credit pyramid ponzi schemes cannot continue indefinitely. The world is still shopping on credit for what they want instead of what they need. I was young once and would have cut off my right arm to own a certain shiny new vehicle. Now I do not own one and have no desire to park one of those over engineered metal monsters in my driveway
When companies like Bayer start making stupid moves like trying to acquire Monsanto you know we are in trouble. Fast forward some years down the road and they will be in financial trouble struggling to meet all their debt payments for their greedy acquisitions. Look at the greed that hit energy markets when oil hit $100 a barrel. Even their own shareholders are questioning their madness. Again its a sign that companies have the word zero interest rates embedded in their brain. They think this low interest money madness party will continue forever. Its all part of a plan for a few companies to control 90% of the market if they can.
Mike:onsumers as possible, so Now is the time to reduce taxes and find the right balance between our need to grow the economy and have fair regulations. This must be done at all levels of government. We ned to put as much cash in the hands of consumers as possible, so that this excessive debt can be paid off. We need to go all out to save as many jobs as possible. We need to retire Keynsian economics to the ash heap of history with communism and socialism. We need to finally introduce the American people to the Austrian school of economics as articulated by Van Mises, Von Hyack and Rothbart. And last and certainly not least we need a gold standard for the 21 st century. Regards, Robert Calabro.
Did they get a picture? Thank god they didn’t use any special forces so they don’t have to airplane crash ’em to cover their con job. Whackos with toys.
The above scripture is appropriate. But a late 19th century economist Thorstein Veblen delineated the problem in “The Theory of the Leisure Class” which few people read anymore since the Bushes and the Clintons came into grace. Veblen became a professor at the University of Chicago,which was funded by John D.Rockefeller. That group has since asserted that further investment in petroleum is unwise and immoral. Veblen was the only economist listed in Robert Heillbroner’s “The Worldly Philosophers”,the rest were europeans. The federal reserve keeps the money supply up so this wasteful group can buy back stock,pay high salaries,bonuses,and benefits.
Corporate debt soared over an “Everything Bubble” to keep buying U.S. standard. How about them apples!