Monday, November 30, 2015


With record profits one might be inclined to think that corporate America and the economy are doing fine, right? Think again. Corporate America is in no position to lead the economic "recovery," and now owes more than it did before 2008.


This happened because corporate America has spent years playing accounting tricks with their bailout-sourced money. As economist Joseph Schumpeter might have put it, corporate America has effectively been playing monopoly rather than building them. And they've gone wildly into debt in the process.

This is how it happened.

The Federal Reserve's post-2008 decision to bailout Wall Street and corporate America with a seemingly endless stream of cash has put a flood of money into our markets. Banks and pseudo banks around the world have been able to borrow lots of money at record low interest rates because of the Federal Reserve's bailout policy. Here's a useful, if not stunning, visual of the trillions made available to corporate America.

All of this money was supposed to lead to renewed investment, higher incomes, and more profits after the market collapse of 2008. Instead, dumping a boatload of money in to the laps of an already greedy and rich class of people has only exacerbated a trend that's been going strong for the better part of 30 years now: Wages are stagnating while profits, especially in the financial sector, have soared.


How has this been happening, you ask? This is a good question, and takes us to the primary reason for this post.

While we can blame globalization (shifting jobs overseas) and new technology (replacing jobs with machines) for stagnating wages, the reality is favorable legislation (especially pro-globalization, anti-union, and low tax legislation) and regular bailouts (again, trillions of dollars) have allowed the financial sector to gobble up the vast majority of money made (i.e. profits).

The chart below, courtesy of Zero Hedge, shows us how regular bailouts and favorable legislation have made access to money so easy that corporate America effectively decided borrowing money to make bets in bond markets was easier than making real investments. So they got lazy and borrowed lots of money to make these bets. Today corporate America now owes 15% more than it did before the market collapsed in 2008.


"Gross Leverage" = Borrowed Money / Investment Grade Bonds = IG / High Yield Bonds = HY

What's happened is corporate America decided to focus on smoke and mirror accounting tricks to boost their numbers. Specifically, corporate America:

* SMOKE: Used borrowed and low interest money (courtesy of the Fed) to pay dividends to impress and keep impatient shareholders.
* MIRRORS: Used borrowed money to buy back stocks, which artificially boosted popularity and pumped up prices.
* MAN BEHIND THE CURTAIN: Used borrowed money to pursue costly mergers that may boost revenues and lower costs in the short term but - as Carly Fiorina's history of merger fiascos at Hewlett Packard demonstrate - often cause more problems than they're worth

In a few words, in spite of record profits, corporate America has not been investing in brick and mortar (or aps and software) projects. They've used favorable legislation and cheap money to borrow and play accounting tricks. Unfortunately, they've now borrowed more than they did before the 2008 market collapse. Once interest rates begin to move upward this debt and bond driven business model will begin to unravel.

Here's the real problem: While they will have no one to blame but themselves for choosing to play monopoly rather than build them, corporate America will no doubt blame others when the going gets rough.

And Wall Street will be at the front of the bailout line that, incredibly enough, is already forming.

- Mark 

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