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March 7, 2019 | Destructive Policies and the Downturn Debt has Amplified

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Individuals, institutions and corporate insiders have been net sellers of stocks in 2019 even as corporations, directed by those insiders, continue to buy back shares and pile on debt to do so.  See Stock buybacks top Capex for the first time since 2008 and This stock market rally has everything but investors:

The surge in buybacks reflects a fundamental shift in how the market is operating, cementing the position of corporations as the single largest source of demand for American stocks. The binge has helped sustain a bull market approaching its 10th birthday, even in the face of political, international and economic uncertainty.

Meanwhile, financial stress is predictably rising on higher rates, record debt and falling revenues.  See  Investors urge debt bloated US companies to shape up:

“Growing debt piles have fed fears among investors that if companies do not start to get a grip on their borrowing, worsening economic conditions could imperil their ability to fund themselves. That could potentially send credit ratings even lower, into the junkyard of “high yield”.

A global survey of investors carried out recently by Bank of America Merrill Lynch found that 50 per cent of respondents would rather see companies using their cash to mend balance sheets than spending it on plants or equipment, or returning it via buybacks or dividends. That was the highest percentage since September 2009.”

After enabling this destructive chapter with near-zero rates for a decade and trillions in QE liquidity funnelled into buybacks and bubbles, now central bankers are saying they have to pause in normalizing rates out of concern for the fragility of corporate balance sheets!!  And yet, maintaining the status quo will only make the problems at hand grow even bigger.  See Fed’s Kaplan says U.S. corporate debt a reason for rate-hike pause:

“A $5.7 trillion borrowing binge by U.S. companies could make a slowdown in the world’s biggest economy even more painful and is one more reason the Federal Reserve was wise to put interest rate hikes on hold, Robert Kaplan, president of the Dallas Fed, said…

Companies with big debt loads may be more likely to cut spending and hiring in a downturn, “and the danger is that with a sufficient enough slowing, you’ll have a greater deterioration in credit quality than you would otherwise, which could in turn amplify the slowdown,” Kaplan said.”

The dots are obvious to connect here:  easy credit is the cause, not the fix.  Only higher rates, tighter lending, insolvencies, break-ups, restructuring, write-offs and deserved financial pain will finally right and restart our economy on more stable footings.

Continuing to enable dumb, reckless and criminal actors can only perpetuate more of the same, along with more waste and cost, for even longer.

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March 7th, 2019

Posted In: Juggling Dynamite

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