Bloomberg comments Capitalists Without Capital Are Ruling Capitalism
Some 40% of public stocks quoted in the U.S. have negative tangible book value, meaning that their tangible assets aren’t worth enough to repay all their debt. Two decades ago, this was only true of 15% of companies, according to Vincent Deluard of INTL FCStone Inc., who has carried out intensive research on the subject.
Such companies sound dreadful. In tangible, material terms their share certificates aren’t even worth the paper they are written on. And yet, incredibly, a “negative-value” fund, composed of the shares of companies with negative tangible book value, would have beaten the main U.S. stock market, represented by the Russell 3000 Index, by 24% over the last 20 years. That outperformance has almost all happened since the financial crisis — before that, the negative-value fund had roughly tracked the benchmark.
Extreme Zombification
This is of course a result of Fed-sponsored zombification by keeping real interest rates negative for most of the last decade.
Real Interest Rates
Real means inflation-adjusted.
I created the above chart by subtracting year-over-year Consumer Price Index (CPI) from the Effective Fed Funds Rate.
Yet, the CPI is a fatally-flawed measure of inflation.
It fails to factor in housing prices and dramatically understates the rising cost of medical care.
Yet, even though inflation is hugely understated, real interest rates have been mostly negative since 2002.
This encouraged speculation in spades.
Meanwhile, thanks to Fed bubble-blowing policies, companies that have no tangible value can keep rolling over debt and even adding to it to pay the bills.
Mike “Mish” Shedlock
Thanks Mish for chart ! Walking Dead Market has been around us since house bubble’s crush. Can you share your thoughts about your approach to stock pick ? Thanks
Mish is right the CPI is a fatally-flawed measure of inflation. However, the Fed and “supposed economic experts” have convinced people that inflation is 0 – 2%.
Kudos, excellent investing
Negative tangible book value and even negative equity are meaningless on a standalone basis. TBV is a measure of liquidation safety, which is not the same thing as operating safety. Cash flow, while not the be-all and end-all, is very important for the latter.
In reality, a positive tangible book value isn’t even a good measure of liquidation safety. Assets are sold at market value, not book value, and that tends to drop as a company approaches operational failure, aka insolvency. There are companies that currently have positive TBV that will fail in a nasty recession and companies (e.g., PM) that have negative TBV (in fact, PM has negative shareholder equity) but will survive just fine.
Also, TBV can be understated because asset BVs include depreciation / amortization / impairment charges. An asset could be written down to 0 and still be used in the business and have market value.
“Mish on one hand you criticize the Fed and the current system and on the other you say Warren and Sanders are nuts. Since when are these two positions in any way dependent on one another?”
They aren’t and I never said they were. ironically it was@Casual_Observer who implied they were when he said “You don’t seem to know what you stand for more than what you stand against.”
Quite idiotic.
I am against the Fed
I am against war
I am against socialism
I am against unions
I am for market setting interest rates
I am in favor of the US minding its own business instead of being the global leader in war activities
I am for capitalism
I am for a free market in money
I am in favor of right to work laws
I have stated the above countless times, so much so that any regular reader should know what I am for and what I am against.
Indeed, they are opposite sides of the same coin.
Thus@Casual_Observer’s comment “You don’t seem to know what you stand for more than what you stand against.” is down right idiotic
Maybe a unifying theme is that this central banking (but chiefly FED) manufactured fiasco will have a political fallout – one way or another.
Creating actual value in a competitive environment, is not entirely trivial. It does take some modicum of talent and effort. Hence requiring that one creates any value, in order to make big bucks, is not compatible with the policy of transferring as much wealth as possible to the sort of idle, connected, hardly literate idiots which can be relied on to mindlessly cheer for The Fed, Dear Leader and The Syyyyyystem.
So instead, a less demanding of the recipient way to transfer all wealth from productive people to useful idiots was needed. And financialization fit the bill. Such that, by now, reliably cheering idiots both own and control virtually all wealth in the US. The dumber the richer, and the stupider the more powerful. Just as intended.
Zombie companies are typically brought as shell companies to build some kind of scam or money laundering scheme upon.
“Yet, the CPI is a fatally-flawed measure of inflation. It fails to factor in housing prices and dramatically understates the rising cost of medical care.”
Plus property taxes, utilities, and insurance. Only my humble personal experience.
This is exactly why people are gravitating to socialism. They are tired of being f’d over by the elitists. Meet the new boss, same as the old boss, only worse.
Kind of makes sense to buy zombie stock. What is dead cannot die.
No thanks. I’ll stick with gold and gold stocks.
Other lifeless things.
The extreme level of share buybacks is THE major factor here. It isn’t that these companies are not profitable (although of course some are), it is just that their balance sheets are hyper-leveraged due to share buybacks.
And this is why the next recession will be absolutely devastating for the stock market.
The choices in 2020 are to either keep the current systems in place or blow it all up completely and start over. Mish on one hand you criticize the Fed and the current system and on the other you say Warren and Sanders are nuts. At the end of the day the choice is between status quo or upheaval. You don’t seem to know what you stand for more than what you stand against.
“You don’t seem to know what you stand for more than what you stand against.”
Apparently you cannot read
Elections are binary choices. This one will be too.
Since when are these two positions in any way dependent on one another?
The Fed deserves to be criticized for serial bubble blowing, enabling ridiculous levels of federal deficit spending, and distorting market interest rate signals to the point where some people postulate with a straight face that “negative rates” are a good thing for the economy.
Warren and Sanders deserve to be criticized for promoting unworkable wealth-redistribution schemes that they believe will buy votes, notwithstanding that each is probably well aware such policies will take what is left of future US prosperity and flush it down the crapper.
I would argue that Warren and Sander’s plans are completely dependent on the Fed being there to monetize debt to pay for their insanity. There is no way in hell tax revenue alone would be able to
Exactly. A binary choice will be the choice. At the end of 2020 we will get change or more of the same systems.
Warren and Sanders are nuts, as well as flat out retarded, specifically because their proposed “solutions” is to double, triple, quadruple…. down on the current system of government intervention; instead of properly and completely blowing it all up.
Neither of them have the sense, nor brains, to back ending the Fed, by blowing it up literally, by Jan 1. Nor for hard defaulting on all Federal debt at the same time. Nor for getting rid of all and any activity tax, along with the spying all such depends on. Nor ending ALL wars and military engagements, again by Jan 1. Nor for ending any other entangling alliance, period.
Etc., etc.. Instead, all that either of those clowns clamor for, is even more of the same dysfunction which has destroyed once-was-America already: More Fed, more printing, more wealth transfers to braindead but connected idiots, more government, more alliances, more meddling……
Blowing the current system to smithereens, and replacing it with nothing but a blown-to-smithereens smoking crater, is as far from what either of those morons stand for, as you can possibly get. And that is exactly why both of them are completely, 100%, useless. No different from anyone else dumb enough to support retaining any facet at all, of the current progressive “system.” Instead of simply blowing it all sky high without any further ado at all.
You are incorrect about them being retarded, they are worse and its an insult to any mentally challenged individual.
I see what you’re getting at. You’re suggesting that if either Warren or Sanders get in, their policies are so so batsh*t crazy that it will end the very system that Mish rails against. Ergo, he should be supporting their ascent to power 😉
Ding ding ding. Finally someone who sees the point of my comment.
Positive revolutions come from good ideas executed by brilliant leaders in a healthy culture. See the American Enlightenment.
It is inconceivable that some catastrophic “reset” will lead to anything good. Things can get a lot worse from here, and there will be no magical bounce to freedom and prosperity. Freedom isn’t free, as they say.
Positive revolutions come from making government smaller, period. It doesn’t matter how. Noone needs “Leaders.” Neither Dear nor otherwise. Only freedom from such.
The Black Death, for example, worked perfectly well. Simply by destabilizing the status quo sufficiently to weaken the previously entrenched leeching, “Leading” classes.
Pox arguably served a similar function in The New World. By presenting North American settlers with largely virgin land, which put the onus on individual productivity, rather than on Raj style politicking and other weaselly elite-pastimes. Had Washington and Jefferson been stuck in India, it is highly unlikely India would have magically become the land of (temporary, unfortunately….) limited government and the 2nd amendment.
As you say, Freedom isn’t free. Instead, what it takes is standing up to “Leaders.” Prospective as well as entrenched. Or, in the few corner cases when such beasts may be a necessary evil; to severely constrain them. Hence preventing them from ever escaping the tiny little, strictly enumerated, boxes and niches where they just about may possibly serve some useful role.
It takes the right kind of government to preserve freedom — to defend an individual’s rights of property and action. The Founders created such, in the context of a culture that wanted it, whether you give them credit or not. By the way, anarchy is not freedom, it is gang warfare.
Anarchy is gang warfare between NATO and The Soviet bloc: Peace in Our Time, on account of all parties having too much to lose by letting cold wars turn hot.
It no doubt does take the right kind of government to preserve freedom. But it takes the right kind of citizenry to constrain government to do just that, and nothing else. The Man on TV won’t magically do so out of the kindness of his heart and his infinite wisdom of how to do so.
Just like central planners attempting to achieve any other worthy goal, he is fundamentally both unwilling and unable to do so. Hence, hie can succeed only to the extent he punts, gets out f the way, and lets people work out the details on their own. Just as The US Founders were constrained to do.
bradw2k “It is inconceivable that some catastrophic “reset” will lead to anything good.” viz. the election of President Trump.