BOSTON — You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they’ve paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.
It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.
Again, back to the charts:
See the blue section? Yep.
$10.9 trillion, to be precise.
To be fair, it is down some from the peak, which was $11.16 trillion in Q4/2008. But the recent low, that is $10.9 trillion recorded in Q4/2009, is now up by close to $300 billion.
So when you hear “record cash”, you have to subtract back out the liabilities. At least you do if you’re being honest, which none of the mainstream media clowns are.
Let’s look at this with a bit different perspective via charts:
There’s your “growth” in non-financial business credit.
Now let’s compare against stock prices to see whether leverage is “reasonably reflected” in them….
Uhhhhh… that’s not so good…..
Specifically, notice that during the “climb out” from the 2002 dump leverage continually increased. That is, while prices roughly doubled so did total outstanding business credit. The problem with this progression is that you only get benefit from that if you can profitably employ the credit you have out.
When equities dove then and only then did businesses cut back – and not much! And now, with the nice little rampjob from the lows, businesses have stopped de-leveraging.
Into excess capacity this is suicidal and is one of the (many) reasons that I say that equity valuations are dramatically unattractive at the present time. De-leveraging grossly compresses multiples, which serves to amplify the damage that comes from debt service that is required on non-productive borrowed funds.
“The street” talks about how “debt markets have pretty much returned to health” (other than securitized mortgages and similar things.) Sure they have – for the snakes on Wall Street, who are back to their asset-stripping and skimming game.
But this isn’t healthy for business at all – it’s destructive, and ultimately I fully expect it to be reflected in equity prices that are much lower – probably materially below the March 2009 lows.
The opportunity to de-lever and take that debt DOWN, which would provide the room for true economic recovery, has been squandered. Instead the media and government have done everything in their power to protect the “earnings power” of the big banks, which of course make lots of money by stripping it off the debt pipeline. That, however, only serves to help them at the expense of every other business in the economy.
It’s nice to see someone on a “mainstream” site get it – even if they are two years late with their recognition.