by Mish

Yet, I believe the stock market is at least 50% overvalued, and a 40% to 60% “net” decline is coming.

My view is the decline will be slow and miserably painful for all involved, but there will not be a “crash” defined as a 35% plunge or greater in a single year.

To understand my view, we first need to discuss corporate debt.

It’s the Debt Stupid!

Yesterday, Bloomberg author Sho Chandra wrote Corporate America Has Amassed a Record Amount of Cash.

The idea that “Corporate America has never been in better shape to put its cash hoard to use on everything from investment to acquisitions, share buybacks and dividends. Or just hold on to it,” is preposterous.

I “politely” replied to Lisa Abramowicz‏ …

I do not know if I inspired her or not, but today she accurately Tweeted …

She also Tweeted …

Let’s dive into her first post: The Great Corporate Cash Shell Game.

There’s a mystery hidden on the balance sheets of Corporate America: These companies have a record amount of cash and they’re more deeply indebted than ever before.This seems paradoxical and kind of silly. Why raise money from bond investors when you already have the liquid assets on hand? As Bloomberg News reported Thursday, non-financial companies’ liquid assets, which include foreign deposits, currency as well as money-market and mutual fund shares, reached a record of almost $2.3 trillion in the second quarter. That’s an increase of nearly 60 percent since mid-2009. This cash cushion also appears sort of comforting; companies can do whatever they want. They’re rich.NON-FINANCIAL COMPANIES’ LIQUID ASSETS AS OF SECOND QUARTER$2.3 trillion.

But in reality, it is neither silly nor overly comforting. First of all, a disproportionate amount of the cash is held by the biggest companies, such as Apple Inc., Microsoft Corp., Alphabet Inc. and General Electric Co., and it is mostly held in overseas accounts. These corporations can’t bring that cash back without incurring steep tax bills, so they’ve been keeping it offshore. When they need money, they simply raise dollars by borrowing from the bond market at record-low rates.
The average numbers from the Federal Reserve wash over the areas of Corporate America that are less cash rich and are still building their piles of debt. A greater proportion of investment-grade corporate bonds outstanding are tied to less-creditworthy companies, and their maturities have been stretched out.

So yes, Corporate America has a lot of cash. But companies also have a lot of debt, and to the extent they’re using their money, it hasn’t been to create the virtuous cycle of economic investment that many have been hoping for. These stockpiles of liquid assets shouldn’t allay investor concerns about credit markets.

Cash Squandered

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As Abramowicz pointed out, much borrowing took place sipplu to buy back shares at absurd prices.

That money was effectively squandered.

Yet, despite that waste, corporations still have a lot of cash on their balance sheets (with a corresponding amount of debt as well).

How Does That Stop a Crash?

To explain, think back to March of 2009. Companies had no liquidity. Viable companies could not roll over existing debt. They were on the verge of bankruptcy as they did not have cash on hand to make bond payments.

Not only were companies on the verge of bankruptcy, share prices crashed taking that factor into account.

Today, corporations have cash on hand to make bond payments, provided the companies do not use that cash for expanding operations.

As a side note, the Fed and many media pundits cannot figure out why companies are not using their cash to expand. The reason is simple: Companies need enough cash on hand to make bond payments.

Cash needed to prevent another liquidity crunch cannot be used for any other purpose, including expansion.

Stocks could crash for other reasons, of course. Another Eurozone debt crisis or a war with North Korea that takes out Seoul could easily cause a crash.

However, a liquidity-driven crash similar to 2008-2009 does not seem likely. Instead, my model suggests we face a long drawn-out decline over many years similar to events in Japan.

Understanding Bubbles

If you wish to understand the nature of the bubbles we are in, a few recent articles of mine will help.

  1. Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
  2. Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
  3. Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?” Mish Reading List

Rule of Total Morons

For further discussion of the bubbles in play, please see Rate Hike Cycles, Gold, and the “Rule of Total Morons”

Mike “Mish” Shedlock

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