Bloomberg reports U.S. Business Debt Exceeds Households’ for First Time Since 1991.
With the record-long expansion in its 11th year, Fed policy makers have indicated in recent months that they’re watching the corporate debt situation closely. Chairman Jerome Powell said in October that “leverage among corporations and other forms of business, private businesses, is historically high. We’ve been monitoring it carefully and taking appropriate steps.”
Hello Fed, I have a Question
Uh.. Pardon me for asking, but could you please explain the “appropriate steps” that you have taken?
Thank You.
Financial Accounts of the US
With that pertinent question out of the way let’s take another dive into the details of the Fed’s Z1 report on the Financial Accounts of the United States.
Seven Key Details
- The net worth of households and nonprofits rose to $113.8 trillion during the third quarter of 2019.
- Domestic nonfinancial debt outstanding was $53.9 trillion at the end of the third quarter of 2019, of which household debt was $16.0 trillion, nonfinancial business debt was $16.0 trillion, and total government debt was $21.9 trillion.
- Domestic nonfinancial debt expanded 6.3 percent at an annual rate in the third quarter of 2019, up from an annual rate of 3.1 percent in the previous quarter.
- Household debt increased 3.3 percent at an annual rate in the third quarter of 2019. Consumer credit grew at an annual rate of 5.1 percent, while mortgage debt (excluding charge-offs) grew at an annual rate of 2.7 percent.
- Nonfinancial business debt rose at an annual rate of 5.7 percent in the third quarter of 2019, up from a 4.4 percent annual rate in the previous quarter.
- Federal government debt increased 10.4 percent at an annual rate in the third quarter of 2019, up from a 2.1 percent annual rate in the previous quarter.
- State and local government debt expanded at an annual rate of 0.5 percent in the third quarter of 2019, after contracting at an annual rate of 2.5 percent in the previous quarter.
I picked up that lead chart idea from Sven Henrich.
Here are a few Tweets to consider.
Fed Balance Sheet
https://twitter.com/NorthmanTrader/status/1205221849795366912
Credit Card Defaults
https://twitter.com/NorthmanTrader/status/1205212116053037057
Corporate Profits
https://twitter.com/NorthmanTrader/status/1203245746797076481
Bond Buying
https://twitter.com/NorthmanTrader/status/1205106819426746368
Everything is Fine
Where?
Everywhere.
The Fed clearly has everything under control.
Please consider Fed Brainwashing on Net Wealth in One Picture.
Mike “Mish” Shedlock
I charted the series on a log scale and added a line showing the ratio. Excluding volatility from recessions, the average ratio of corporate debt to profit does look like a pretty steady multiple since the early 90s. The multiple appears to increase around recessions, mostly due to falling profits rather than increasing corporate debt.
Mish wrote: “Domestic nonfinancial debt outstanding was $53.9 trillion at the end of the third quarter of 2019…”
Then he linked to his prior article which has a chart reflecting less than $25T of domestic liabilities. (“Fed Brainwashing on Net Wealth in One Picture”).
What’s the difference?
More monetization ahead.
“With the record-long expansion in its 11th year, Fed policy makers have indicated in recent months that they’re watching the corporate debt situation closely.”
At some point it will blow up, in their face. Serves ’em right.
AT LEAST OVER HERE IN EUROPE WE HAVE BEEN WARNED;
Where to put your savings?
When a bank go bankrupt almost every country here promesses, a 100.000 Euros to be paid back. There should be an insurance funding sufficient for that.
However if say fives bank in the same country go bankrupt together, the same depositor will only receive 100.000 euros back from the fund although he deposited 500.000 Euros in 5 different banks.
If he deposited 500.000 euros in five different banks in different countries so far the last decision will be of the resort of the European politicians.
If he has a stock account in these banks, no one bank guaranty that the stock value will be paid back.
If he has a vault in those banks, no one guaranty that the vault content will not be part of the total deposit calculation.
We know all that because around 2010 CYPRUS banks failed and the European politicians discussed the conditions of banks deposit refunds.
The question is how much of our savings are we accepting to loose one day when the worse happen?
If it is zero per cent, then only precious metals qualify.(not stored in the bank vault)
Four natural market forces will eventually correct this cycle of Fed-induced debt excesses:
1.Write offs/write downs, like the $10B hit Chevron took earlier this week. Four majors have now written down assets since the Saudis dumped prices in 2014. As these firms are non-zombies, they will continue in business, but the $400+ billion excess debt, capex, etc. into the oil patch since 2008 will continue to come back out.
2.Mergers at fire sale prices. Those with useful assets, become zombies easily borrowing while waiting for Godot, will be bought out at greatly discounted prices, essentially extinguishing the related debt
3.Zombies in bankruptcy. There will be a much higher ratio of chapter 7 filings liquidation) to chapter 11 filings (reorg) this cycle due simply to the fact that the Fed’s zirp infinitum has enabled it.
4.Rising interest rates. When the recession starts, bank loan committees all get loan quality religion in the same moment, as always. Companies like Tesla become instant roadkill.
Few consider that, when the Fed follows the market in raising rates (as it always does) a mere three percent increase in the long bond rate is equivalent, in capital loss to the bondholder, of the average junk bond default haircut, about 30%, since WWll.
Eventually…
“Everything is Fine”
…
ALL eleven sectors?
The latest from factset:
Earnings Growth: For Q4 2019, the estimated earnings decline for the S&P 500 is -1.5%. If -1.5% is the actual decline for the quarter, it will mark the first time the index has reported four straight quarters of year-over-year earnings declines since Q3 2015 through Q2 2016.
Earnings Revisions: On September 30, the estimated earnings growth rate for Q4 2019 was 2.4%. All eleven sectors have lower growth rates today (compared to September 30) due to downward revisions to EPS estimates.
I should have added S&P 500 +26% ytd, naturally.
Total stock market capitalization is on pace to grow EIGHTEEN times faster than the economy itself in 2019.
Insane and obviously unsustainable.
The evil thing about this is the damage is done years before anyone can unequivocally prove it is bad policy. Mish’s chart lays bare what is happening: New credit creation is tremendously outstripping productive returns. This ends when corporate profits shrink for a long enough period that everyone understands massive defaults are unavoidable. Judging from the 2000 and 2008 cycles, the gestation period for large defaults takes about 4 years after profits begin to shrink. It appears for this cycle that corporate profits began shrinking around 2015.
Can the Fed reverse this trend and increase profits by handing ever larger bails of money (in the form of credit) to federal government, banks and hedge funds? They are apparently going to try. Hint to Fed: if you create more credit in this situation you may indeed extend this asset bubble somewhat, but that new credit is not going to be used productively, and mostly you will line the pockets of a select few while digging a deeper financial hole for everyone else. The Fed is enabling something analogous to a Ponzi scheme.
This is why MMT is coming. To put money in the pockets of the Average Joe and to boost corporate revenues. Once the consumer is tapped out what other choice do you have.
Issuing new money for direct consumption will quickly put us at the point where the Soviet Union was when their people wryly said things like “They pretend to pay us and we pretend to work.” It will usher in the total destruction of the dollar as a reserve currency.
I am not saying that cannot happen; however, I do not believe it will be allowed until after central banks have a replacement for the US dollar ready. A monopoly on creating US dollars is at the core of banking power, and I do not believe the banking system will go along with destruction of the dollar before they have a replacement. If you can shed some light on what replacement for the dollar is on deck, then I will be willing to accept that direct money printing is the next move (as opposed to credit creation where credit must be repaid and rolled over, or else collateral is forfeit).
What a bunch of jackasses! I love the record credit card defaults and record sign up attempts going on at the same time. This system is finished. Problem is how long can they drag it out and what will be left of us peons in the end?
FED Balance Sheet chart. Looks like it is working a “buy the breakout” moment in January.
With corporate balance sheets so highly leveraged, the next recession will absolutely devastate the stock market and leave many, many well-known firms in bankruptcy.
How the Fed and Federal Government respond to this inevitable crisis will have huge ramifications.
“With corporate balance sheets so highly leveraged, the next recession will absolutely devastate the stock market and leave many, many well-known firms in bankruptcy.”
How many unemployed, as a result?
Tens of millions.
And the Federal deficit will spike to nearly $3 TRILLION, along with massive Fed QE and negative interest rates.
The big question will be, “Can the $USD survive this?”.
Yep, the equity cushion is fast disappearing. The creditors will end up owning a good chunk of these businesses. A huge recapitalization will need to take place.
The SEC can easily kill the debt beast with one FASB bulletin. I’ll even write it for them:
Effective immediately, Rule 10b-18, issued in 1982 which authorized the repurchase of corporate stock is repealed.
If going cold turkey, as above, is deemed too hard to sell to the C suite gang, I’d propose the following compromise bulletin which will also pull the plug on issuing debt to buy stock to jack C suite comp plans:
Effective immediately, a fifth rule is added to the four existing rules governing stock buybacks:
All future management and board member compensation resulting merely from a change in shares outstanding is hereby disallowed.
Since stock repurchases are exactly the same, mathematically, as one time dividends, that wouldn’t change anything. You would have to also ban dividends. Alternately, you could try to come up with some arcane rules preventing new debt from being used for dividends/stock repurchases.
Dividends are not the corporate debt driver, buybacks are…$800 Billion in 2018.
If I’m the CEO of a firm earning $100 million, with 100 million shares outstanding, priced at $15.00 and I convince a friendly board to give me a stock option and comp plan based on driving my p/e ratio, I can make my nums by simply buying back stock, even if I borrow money to do it. Thus, dinking with my cap table enriches me, but stockholders will balk if I try to claim credit, via my comp plan, for merely paying a dividend.
Looks like conversion of capital to income.
“It should be clear why we are nearing the end of an epoch. Prices have been rising for a long time, and could keep rising for an even longer time. But conversion of capital to income, to spend, is like eating the seed corn. That cannot last forever. Sooner or later, you run out. And then real misery begins.
It should be clear that Keynes was right. We think he was a genius (though evil), and one of the smartest guys in the room. He did not mean rising prices will ‘overturn society.’ He meant the falling interest rate, which he said would commit ‘euthanasia of the rentier’—kill the saver. That is happening now. With each rise in asset prices, the yield drops.
And the primary reason why ‘not one man in a million is able to diagnose’ it is that everyone loves a bull market. They’re too busy getting others’ capital as their income.”
In the 1930’s Glass-Steagall was instituted so that “this can’t happen again.”
In 1999, it was dismantled. The reason it was dismantled was so that “this could happen again.” And it has. Cycles repeat. Regulation is followed by deregulation is followed by re-regulation. A bubble in one financial instrument is followed by a bubble in a different financial instrument. Wash, rinse, repeat.
Human nature prevents stopping the runaway train. The politicians all want to get re-elected. If they do what is right, they lose their job. It is a self fulfilling perpetual motion machine, until the meter hits TILT and the wheels fall off.
Because the chart so clearly show leverage suddenly started growing from a flat line out of nowhere in 1999….. Instead of around the time period when Nixon went off Gold….
“Does anyone spot a problem?”
Looks like a typical parabolic chart. The far left side of the chart looks little better than a flat line. The tread mill then starts running faster and faster, eventually ramping up to maximum vertical velocity. Then the chart breaks down.
Yes, it’s charts like these that warn you the end is not far away. By the time monetary policy makes debt virtually ‘free’ to everyone, the currency will be cooked, worthless.
“The last time corporate profits stagnated while corporate debt accelerated higher was during 2000 just before the recession in 2001.”
…
A mention needs to made on quality of corporate debt. The reach for yield by investors has led to surge in covenant – lite leveraged loans among other dreck. Has kept the expansion truck on the road well past historical expiration … but will make the inevitable crisis deeper / longer.
“Uh.. Pardon me for asking, but could you please explain the “appropriate steps” that you have taken?
Thank You.”
…
Spot On.
Doing ANY sort of “appropriate steps” = Taking Away The Punch Bowl
Therefore, ZERO will be done – lest you be blamed for causing the bubble to burst. Banksters will do what they ALWAYS do – look the other way until the inevitable crisis – then step in and try to clean up the mess.
All this is caused by central bankers. The damage they’ve done and continue to do is not even fully visible, but it’s beyond repair. Just look at the past decade of zero growth in the EU, whilst government debt and private debt -due to assetbubbles- has risen dramatically. A decade of wealthtransfer from savers to speculators and still, they double down and implement more of the same. The Overton window needs to be on the destruction these fucking bankers are allowed to create. Time to educate the sheeple who’ve been lulled to sleep and distracted with tech-bullshit and vapid consumerism.
Obviously that is it. Lower the rate to 0, businesses do the logical thing, and borrow more, and return it to their equity holders via stock repurchases or dividends (which are the same thing).
At the expense of everyone else. When public debt is skyrocketing, corporate debt is at an all-time-high- and real GDP growth is negative -which it is, considering the CPI is being manipulated- then this cannot be anything else but a ponzi-scheme. But guess what, all ponzi-schemes collapse eventually.
Surely a better comparison is the cost of this debt to corporations, rather than the level of outstanding debt? With record low interest rates, long dates or perpetual bonds at 0% are hardly a problem for a company, unless they rely on having to always issue new debt to fund operations?
Debt that is never paid back is actually a problem.
Or should the Fed just run up their balance sheet to a zillion dollars, and then we’ll all live like kings?
Debt that is never paid back is a problem for the creditors. I’m not saying debt ought to rack up, I’d just be interested in a chart that compares the cost of debt vs corporate profit
What you are looking for is the interest coverage ratio, certainly an important number missing here. Also relevant is to what extent the lender can raise the rates, which would impact the coverage ratio in the future. There is not enough information to really know the how much of a problem this is.
“The cost of the debt”, system wide, doesn’t change by simply printing money to lower nominal rates. The same amount of real resources are still consumed, and no more real resources are created by simply printing money.
Instead, a portion of the real, economic, cost of debt service is pushed onto third parties, rather than being shared between the parties to the transaction. So while Bastiat’s “seen” may be that “debt service” gets cheaper if one only looks at the direct debtor; the inevitable “unseen” is that the costs are simply being borne by someone else.
You’re assuming a number of things which should never be assumed:
There is a big difference between a company taking on debt by selling $1b in 30% notes at 3% and a company taking on debt by taking a bank loan at 3%. In the first case, if the interest rates rise, the cash needed to service the debt does not change.
They’re all Too Big To Fail and will be bailed out as needed.
We’re not.
And likely to be a very good day for growing bubbles.
It’s not only the rise in corporate debt, but that problem is being compounded by the decline in corporate equity, courtesy of stock buybacks, highlighting the extent that corporate balance sheets are being hollowed out (which primarily benefits the insiders and directors).
Shareholders are paying a higher and higher price for a shrinking slice of shareholder equity.
Shareholders should be paying a higher price for something that is becoming more scarce – all else being equal (like profits, for example). The issue is the balance sheet leverage – as the equity slice diminishes, it heightens the risk that your claim on the company’s earnings will pass to the creditors, especially as higher leverage would ordinarily lead to much higher cost of borrowing (in a normal environment). As this dynamic plays out the delta of a modest fall in profits will magnify the negative impact on the stock price. With corporate borrowing at these levels any sustained rise in interest rates should devastate stocks.
I like Sven Henrich. He’s on it, every single day. And Jeffrey Gundlach was talking about corporate debt as well, in his CNBC interview this week. And Michael Burry too. Luckily, CB’s around the world are handling the situation with a firm hand and responsible policies. Nothing to see here, folks!
Mish,
if you are reading this, I seem to have lost my ability to comment directly on an article. I can reply to others who have commented directly, but I cannot comment directly.
Harry, hope you will forgive me for not replying directly to your point on this occasion.
I have had the same problem for a few weeks where I cannot make an original comment, but I can reply. I also have problem where some of Mish’s stories go to my ‘junk mail’. I run Kaspersky anti-virus. Some of Mish’s columns go thru correctly to my INBOX and others, including Sechel’s comments go directly to JUNK MAIL. I haven’t a clue and am not a techie.
When something like that goes wrong, you are not sure if you have been banned for some reason, or if it is just a feature of the system.
Thinking about it logically, it cant be a banning as I can still comment here. I think it needs to be looked at though. I might have a great thing to say about the next Mish article and the world will miss it!
No worries, you’re grand!
No worries, you’re grand!
Lead chart should be ratio chart. As shown somewhat useless apart from showing growth of both items.
You need numbers to see the ratio? Sometimes a visual is more effective. Absolute stock of debt versus absolute profits. What more do you need?
Tell me the ratio in 1970…
If similar than apparently no problem.