Many people have been predicting another stock market “crash”. I have not been in that camp for reasons I will explain below.
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
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.
- Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
- Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
- 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
The unexpected is not unusual.,
It seems crazy that a great way to not go bankrupt is to just borrow a bunch of money.
That’s exactly what would happen if you or I tried it. However, if they can borrow money at, say 2%, all they have to do is to be able to find investments that earn more than 2%, and the income pays the interest. For a corporation, that shouldn’t be hard to do. So long as these bonds are at a fixed rate, or can be prepaid, I see little risk. In fact, I see them as a natural and intended consequence of holding the interest rates low.
There is noting new about this. I have known people who knowing they were facing potential bankruptcy borrowed even more heavily and purchased anything that could be liquid assets to hedge for the time when they would have no money and no income.
Today, mare than anytime in my lifetime, there is less concern about repaying debts than I have ever seen. Not only can the markets not fall but it is a common belief (based upon recent history) that default will not be allowed, that banks will set on bad loans indefinitely rather than have to mark them down. The renewing housing bubble just proves to me that this is still the case….they new loans for ever higher prices represent a real threat to balance sheets if there is another downturn…or even slow down.
These corporations feel an even greater insulation from inevitability as the old story goes…owe the bank ten thousand and you got a problem, owe the bank ten million and THEY have a problem. Dodd Frank made it clear that government would protect the “economy” from any financial threat, and we KNOW how they do that…by bailing or insulating/isolating them. Further, the leadership of these corporation have zero accountability to them…they are all hired guns ultimately, so these big cash hordes are used as further “proof” of how well they are doing and it seems NO ONE looks at debt levels as anything but another ASSET.
All I see is those at the top of the pyramid positioning themselves, securing their life boat seating or parachutes (depending upon their preferred route of escape)
A slow grind it out bear market like in the seventies. When it pertains to the stock market, those were not the good old days.
Simon Black nailed the same synopsis:
https://www.sovereignman.com/market-bubble/today-the-music-stops-22415/
Yeah, nailed it by asking us whether we would like to buy his service. NO THANK YOU.
I have no doubt that corporations will fail, but will they default? And will there be a “collapse”.
Yes and NO.
They will default, but it won’t be called such or treated as such.
And yes, there will be a collapse, but slowly at first….like now. You can barely feel it…unless you stop and look for it. It will continue on like this for years, slowly grinding down, one after another “reorganization” merger or acquisition that absorbs one failure after another while JOBS and personal income erode away, either by direct loss or simple costs of living (not inflation). My 28% increase in health insurance for my employees is NOT inflation….it simply reflects higher COSTS, right? The costs for my taxes and liability insurance are not “inflated” either, just because they are continuing to spiral upward. The ONLY way companies can now compete is by BUYING their competition….ELIMINATING their competition…..just like the Chinese are doing. Meanwhile OUR costs increase. But on a positive note, Sam’s club has 70″ TVs for $1200! How many of THOSE do we need?
Did Mexico have a financial collapse? Is Venezuela experiencing a financial collapse? We might think so but does their governments see it that way?
Nope.
We are looking for WORDS to describe our circumstances yet the meanings of words are seemingly changed every day.
Words, notions, concepts, MARRIAGE, statues, recession, depression, default, all seem to be one thing one day and the next they are HORROR. And those managing our language for us are equally normalizing what were once radical words….like COMMUNISM.
stock market will never crash (ever),if it even tries correcting fed will go nuclear ie print whatever it takes and buy every share of every company on the nyse(literally!).This is dystopia on roids,nothin will be allowed to correct just like their will never be an “official” recession,iflation “rate” will never rise above 2% (ever),the unemployment “rate” will never go up again (ever),big brother knows best
What if it does on a Friday or Thursday with a public Holiday on Monday?
Or, there was liquefaction?
i agree the equity market is over-valued and will decline, but a quick near term crash not likely in the absence of a catalyst.
A liquidity-driven crisis unlikely?
If the yield curve inverts then expect liquidity to dry up as it will cost banks more to borrow short term from the central banks then long term yields on corporate and household debt. Look at the credit impulse and M2 velocity of money so see how liquidity and credit are drying up.
I agree … and forget the banks. Liquidity for them (at least the large Wall Street ones) will be provided. The problem is the surge in shadow banking. Vendor financing, Non bank finance companies, etc. OCC has warned on them and they are not regulated as are the banks. Easily see liquidity evaporate for shadow banking.
Corporations do not hold their own stock in the stock market, investors do. And when investors need to sell stock to cover losses elsewhere, crash can happen. Herd mentality prevails. Numbers did not matter on the way up, and they won’t matter on the way down.
Greater fool theory? To strong hands theory?
Does the corporation justify the stock price or does the stock price justify the corporation?
I own my own business….100% of the “stock” as it were. I have no idea what my “stock” is worth.
If a “crash” occurs and a company’s stock goes to zero, yet the company remains operational, what does that mean? That the business is bad, the economy is bad or the “market” is bad?
It would seem to me that the problem for business is debt service. If there is no debt then most businesses should be able to carry a downturn in the economy. I know that is what I have done. Low or no debt and cash reserves.
For these businesses to carry debt far in excess of their capital reserves leaves them terribly vulnerable. Yet we see no such notion in their stock values/prices. That seems like even more risk, when risk is not acknowledged.
Mish — Japan suffered a major “crash”, followed by 30 years of sideways (the Nikkei index went from about 39000 to 8K or so, and has been oscillating between 8K and 15K for the 30 years since).
Are you thinking the S&P will dump from ~2500 to ~1250 (just picking 50% decline as example) and then oscillate between 1100 and 1400 (again, just as example range) for decades?
Or are you thinking the S&P drops a modest amount (if any) and then goes sideways for many years?
Have to agree that the post 2009 debt binge will prevent growth for many many decades. The demographics of the US won’t help either, but out of control debt is the biggest impediment.
We all heard how US real estate “never declines at the national level”, only to discover than it can and did. We’ve also heard these miserable keynesians tell us that US Treasuries have never defaulted, which is technically not true.
Given Obama’s massive debt binge and fake “recovery”, one has to be pretty innumerate to rule out a formal US Treasury bond default in the next 30 years. Not saying it is a certainty, but no prudent investor would look at such a group of deadbeats as Congress and claim this trash is investment grade.
As bad a banana republic clown as Obama was as “el-presidente”, the rest of the country wasn’t exactly being fiscally prudent either. The “great de-leveraging” was a complete lie — system wide debt levels INCREASED even if one excludes Obama’s debts.
Twenty years (or more) of baby boomers working well into “retirement”, selling off securities, downsizing house size (and millenials unable to pay student debts, never mind a mortgage). All of it happening by necessity, just to get by, not by choice.
Generations X, Y, millenial, and whatever letter goes to the next group — will all be scarred for life by debt.
Congress will maintain their egos, but will lose power year after year… power of the (shrinking) purse.
I am thinking along the lines of a 15% correction a 5% rally and 10% decline followed by a 5% rally then another 15% decline, etc. with each of those moves taking a year.
No crash, but at the end of it all the market is 40-60% lower
How about the declines and the rallies balancing out overall but lasting a decade or longer, so the market index could be flat in *nominal* terms but in *real* terms, it could be 40-60% lower?
What about the affects of ETFs, indexing & programmed trading? We haven’t seen them tested by a serious correction. They could plausibly turn a correction into a crash – quite quickly – as everybody sells the same things.
And you think our government would call a “do over”? Wind the clock back and put severe limits once the markets reopen? Only the few shorts out there (which evidently everyone hates) would complain…and who cares?
There IS no spoon.
We invented money therefore the only reason for it to fail is if we/THEY want it to fail.
Everything is currency in this world, an ounce of gold, a digital coin, a stock or bond or a sheet of plywood front running a hurricane. WHAT ARE THEY WORTH? relative to what?
“I am thinking along the lines of a 15% correction a 5% rally”
Even this correction seems to be very high compared to what the Fed would tolerate (0.1%). Look at the amount of verbiage and actions (stimulus or rates) that have ensued over the last 5 years each time it looks like the market will fall. So whether even this correction will happen is anybody’s guess. Assuming the Fed allows it, what is the guarantee that it will not morph into something bigger (the central banksters worry).
But then how long these central banksters (acting in concert) can hold it together. As of now it appears that this is the only way you do not get a crash. So just a whiff that the central banksters will not come running to the rescue of the markets could be enough to make it crash.
Basically, the central banksters (I might say 2012 ‘whatever it takes’ Draghi moment is a defining moment in this regard as it is since then that the CBs have been all in) have muddled the bond and stock market so much that I cannot fathom how they can extricate themselves. If someone can throw a light on this, please do!
I think there has been a paradigm shift in the role of the CBs since 2009 and the interventions cannot be undone without a crash! In fact I would say crash and reset (unlike earlier instances when the CBs came in like the knight in shining armor). So in that context how we can have 15% down, 5% up scenario is a big question.
Mish, what odds would you give for the DOW hitting 33,500 before it hits your target of 16,022 in 5 yrs?
X will get away as I am part of that. Those that lived through the 1990s and early 2000s as adults and learned something only have themselves to blame if they didn’t learn. Y, Millenials and after are totally screwed. They will have to rely on boomers croaking and leaving them a small fortune to pay off their debts. Boomers lived high on the hog as a generation and must pay for their sins by paying debts for the next generation.
When the hot foreign money panics and flees, there will be a crash. After that, slow drain…
Where do I get that long legged hog?
Two significant paras:
“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.” AND
“Today, corporations have cash on hand to make bond payments, provided the companies do not use that cash for expanding operations”.
As we all agree, corporations are on a globalist agenda. Therefore they do not want their funds coming back to the US and losing significantly by way of taxes. As the globalist plan expands, they will be in full control and get richer.
Also, In order to stay solvent, corporations cannot use their hoards of cash for significant expansion or new innovations lest they default on their bond liabilities.
Is it any wonder why every corporation is anti-Trump?
While I agree with Mish that the Federal Reserve will try and manage a soft landing but eventually stock prices will return to “normal” levels, it is entirely possible that some miscalculation or external event may prevent this desired outcome.
Time will tell.
I;m guessing it will be war on the Korean Peninsula that sets South Korea and Japan back a generation. This will then lead to a boom in the US economy as we are one of the few countries that can pick up the pieces as we did after WW2. Wars have always been beneficial for the United States. This time will be no different as long as the bombs fall somewhere in East Asia.
Kim’s crazy but not stupid and neither is Trump. The capitulation will continue (noisily) until such time as the liberal South agrees to reunite with the North rather than face extinction. I seriously doubt that Trump will do anything to NK without the South’s explicit agreement…which does not look like it will be happening short of a full on attack any the North.
This is a world wide slowdown/takeover that requires chaos but also cooperation. Bankrupt NK merging with the South will put them tied directly to the IMF/world bank as world leaders applaud. Collective power requires dependency and nothing will drive the world to that “singularity” than world wide financial failure. If failure was allowed to occur, they would lose control….but the THREAT of it for the world’s nations’ leaders should do the trick. NK will be absorbed into the Borg. It’s all in the plan. A war that could draw in China and Russia is simply too much risk. They have invested generations into this.
I don’t think anyone is actually thinking of a shooting war although there is a lot of tough talk going on from all sides.
This is merely posturing for national political gains.
At what level of interest rates can the federal, state and local governments no longer service and roll over their debt? Same for corporations and individuals? My guess is not much more than 5% on long bonds. The Fed, the ECB, Japan, etc., know this explicitly, so their desire to create inflation, which could get out of control, makes no sense.
Plus, a doubling of 10 year rates would lead to a substantial hit to the stock market. We are in a box that is going to have to be carefully managed. Good luck with that.
What the banks and government want desperately is to have real inflation in high single percentage points (6-9%) and interest rates held in low single percentage points (0-4%).
If you track inflation in terms of what people actually need to spend to survive, that is already happening. The CPI and other indices are deliberately designed to understate inflation to allow the government to slowly decrease its spending on social programs such as Social Security.
The 2017 COLA increase in Social Security was 0.3%. Does anyone really think that inflation is that low?
https://www.ssa.gov/news/cola/
The plan is to keep interest rates below 4% and keep real inflation above 6% or 8% to slowly shrink the REAL value of the debts that the government has incurred.
In effect, this shrinks the real value of the debt, pension plan promises, welfare, etc. by several percentage points per year.
Yes, kids, you will get your Social Security, but also no, for it won’t be enough for you to survive.
I see it much the way a high school diploma is looked at these days. Yes, it will still be around, but it won’t be of much value. You will be expected to have it because it once meant something long, long ago.
(it = Social Security)
“think back to March of 2009. Companies had no liquidity.”
…
True, but what about Crash of 2000 – 2002?
No one knows, but if I had to bet it would be “Crash”.
Record margin debt. ETFs*. Derivatives**. Some potential pitfalls.
*ETFs are a passive investment that mimic something. Very little cash (1%?). When holders of ETFs start to sell en masse there is no buffer. Forcing everything down.
** how will derivatives act in a downturn? Many ETFs contain derivatives (especially the exotic ones). When things get wonky I can see the liquidity in derivatives dry up. Your derivative is as only strong as its counter part. If they are failing? I can easily see large (downward) price moves that will panic investors.
Investor sentiment will be key.
Large percentage have been moved to being cleared on a Clearinghouse, so that same nightmare scenario doesn’t exist to the same extent that it did 10 years ago.
Liquidity for derivatives … a mile wide 2 inches deep?
What will happen when things hit the fan?
LONDON (Reuters) – Global debt may be under-reported by around $13 trillion because traditional accounting practices exclude foreign exchange derivatives used to hedge international trade and foreign currency bonds, the BIS said on Sunday.
Bank for International Settlements researchers said it was hard to assess the risk this “missing” debt poses, but that the main worry was a liquidity crunch like the one that seized FX swap and forwards markets during the financial crisis.
The $13 trillion unaccounted-for exposure exceeds the on-balance-sheet debt of $10.7 trillion that data shows was owed by firms and governments outside the United States at end-March.
The fact these FX derivatives do not appear on financial and non-financial institutions’ balance sheets under current accounting rules means little is known about where the debt lies.
https://www.reuters.com/article/us-bis-debt-currencies/global-debt-may-be-understated-by-13-trillion-bis-idUSKCN1BS0OG
If derivatives threaten to crash the system…they won’t be allowed to. Greece?
Bond holders lost 95% of their value….but still, NO DEFAULT, NO DERIVATIVES PAID.
China? Hundreds of billions of unpayable debt ROLLED OVER TO NEW DEBT. Spain? Banks caput, bad debts rolled into new debts, bad banks rolled into new banks. Where did the bad debt go? Were derivatives triggered?
Exactly.
ISDA is judge and jury … and controlled by the banks.
But you are forgetting 2 sides to every trade. If not triggered then party that held them as hedge gets screwed. Liquidity for derivatives will evaporate if payoffs stiff armed. Who will want to hold a dodgy asset that can’t be hedged?
Look out below.
…. and your list is just the beginning. There are distortions and (as a result) heightened frailties throughout the financial system.
Those who class themselves as ‘Austrians’ will also have noted by now that credit creation via commercial channels has been falling for many months now and is at multi-year lows. This in the presence of Fed tightening … (caveat: ECB and BoJ money printing may be mitigating the combined impact of the above at this point)
As the ponzi scheme which is our monetary system requires ever-increasing money supply growth the chances of a crash are actually higher than most imagine. No doubt the Fed will come charging in when trouble erupts, with money printing, but this trick can only work so many times and even if they manage prop the market up in nominal terms, it’ll fall hard in real terms IMHO.
Is record high margin debt a player in this market crash discussion, or is it inconsequential?
Former New Jersey governor Jon Corzine cleaned out the accounts of MF Global retail investors when he needed to make a margin call in order to continue his rampant speculative bets.
At this point in time, it’s a casino so what do you expect?
Another week of unchanged. Gundlach must be loving those puts. I remember Medex liked that trade too. That was all you needed to know it was doomed.
What I’m seeing in the office is 40% of my department of ~20 people are immediately eligible for retirement, and will be retiring over the next 2 years. The company will be facing a surge in pension payouts on top of salaries of their replacements who will be unproductive more than a year after hiring. Since the company has not prepared to pass the torch, a 3-4 year stress on its finances is about to start. Outsourcing can’t be done due to ITAR regulations. OUCH!!!
My employer got into bed with the derivatives gangs on Wall Street for a $300M of “cash” that comes at 1% and due in 2022. I predict a massive decline in our stock once they realize we won’t deplete our balance sheet and just rollover the debt. This is why interest rates are not rising very quickly anywhere. Corps don’t want high interest rates.
I’ve always said that we will be Japan. If stock market meanders its way for 30 years and is back at 20k in 2047, hardly anyone will notice because many of those that remember the stock market in the late 1990s will be dead and gone anyway. Take a good look at the Nikkei 225 Index from about 1989 until now. That will be us in about 30-40 years.
https://finance.yahoo.com/chart/%5EN225#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
“We” are a long, long way from what Japan was in 1990. Their banks, insurers and the property and construction rackets (largely just a cluster in Tokyo) were overblown; but industry, productivity and the general workforce remained world beating. Still is, which is why noone really cares all that much about the Nikkei. This and that “going up” and “going down,” is a passtime only those lacking the aptitude and competence for more important matters, bother obsessing over, after all…..
The Anglo countries in particular, but increasingly the rest of the West as well, has NOTHING left beyond value destroying rackets. Virtually all else has been decimated, including the ability of the workforce to do anything more productive than sitting idly by, hoping Daddy Fed will “make my home go up.”
Everything is imported, in exchange for vague promises that “we are still great, You know, and will one day pay you back…”, plus the idea that until it is more clear who the new King is, it’s safest to keep dancing around the now deceased one’s grave. Once those two obstacles, one a farce, the other a technicality, is recognized for what they are; it’s a long, long way down. With the final destination much closer to Argentina than Japan. Simply because America, as a society and economy, has much more in common with Argentina, than it does with Japan.
And what about Europe’s “dealers of the financial elite”… don’t they have answers to this ?
https://www.youtube.com/watch?v=r4rjKGHq55Y&feature=youtu.be
Guess not… unless you like sitting quietly outside.
Let’s hope it’s a slow decline over years. I can accumulate a lot of PM’s and other hard assets during that time.
Would not two factors mentioned in the column bode ill for avoiding a crash?
1. The cash is concentrated in the hands of a few large companies. (I think I read that the index runup can be attributed similarly)
2. The cash they do have is overseas. Can you use this cash to pay dollar denominated debts and expenses w/o paying the taxes first?
But is the cash actual (folding money in your hands) physical cash or an entry in a computer? Not much point having a billion in cash if it can vanish or be locked in during a crash. People have gone broke when the cash they have in their accounts (Cyprus being an example) is no longer accessible. If the corporations have billions overseas then those funds could be locked away at the time they really need it, meanwhile the debts they ran up to borrow those funds are still payable.
If you believe in a crash you most likely using the/a wrong model. E.g. try earnings reported to IRS – don’t have that chart handy but it did not spell heavily overpriced
How does the number of Corporations influence the numbers? I understand that there are far less traded than in 2008.
Anecdotally it appears to me that much of corporate growth occurs from absorbing their competitors, and given that is done with stock and debt, would likely not be reflected in their earnings reports. If I was able to eliminate all of my competitors, profitability would be much easier to come by….but my customers not be the winners.
I realize that arguing stock values really has little to do with the quality of our economy relative to the actual people living here…but it SHOULD. If Amazon ends up owning the world, and their stock is worth a trillion a share, how will our economy be doing?
Well I think I don’t know, the market could go up then down, down then up, it might go sideways or backwards, I here people say it can just go off the chart, which is quite a philosophical concept if you don’t think you should be searching around the room or down the street for it. So really you just have to keep an eye on around the chart and check that it isn’t escaping, at least that way you know you are still in charted territory and that means you know everyone else knows and that you got company still. That is all the advice I know, and I am not sure it is correct.
RE: Lot of Cash
I remember in the last crash stories about Ford either had borrowed a huge amount before or had a huge line of credit agreed to before the 2008 drop. Lots of folks were saying how smart and/or fortunate Ford was because of the credit crunch. Ford was liquid in a credit crunch. It got the money first! I think they built some factories or a factory in parts of Asia. Ford had finance for the financial crisis.
And, GM went bankrupt. Or, I should say GMs’ stockholders and some creditors lost out.
Maybe a lesson was learned by other corporations.
“DEARBORN, Mich. — On Nov. 29, 2006, Ford Motor made a surprising pitch to the nation’s biggest banks. In a packed ballroom at a New York hotel, Ford’s chief executive, Alan R. Mulally, said he would mortgage all the company’s assets for billions of dollars in loans to finance an overhaul of the troubled automaker. Although the economy was healthy then, Mr. Mulally said the money would give Ford “a cushion to protect for a recession or other unexpected event.”
At the time, the request was considered an act of desperation. But the $23.6 billion in loans it received turned out to be Ford’s salvation. …”
http://www.nytimes.com/2009/04/09/business/09ford.html?mcubz=0
“Plunging car sales have driven its two American rivals, General Motors and Chrysler, to the brink of bankruptcy, forcing them to borrow $17.4 billion from the federal government to stay in business. The future of both companies will be decided in the weeks to come by President Obama and his special auto task force.
But because of the money it borrowed nearly three years ago, Ford is in far better shape than its two crosstown rivals. The loans have kept it independent and on a course to survive the worst new-vehicle market in nearly 30 years.”
“Still, Ford’s decision to borrow billions {$23.6B} in 2006 when the capital markets were thriving will go down as one of the most significant moves in the company’s 105-year history.
“We believe this foresight to strengthen the company’s balance sheet is what has separated Ford from its crosstown rivals during the economic downturn,” a Merrill Lynch analyst, John Murphy, said in a report to investors this week.”
– There’s another reason why companies are not expanding: Demand is anemic.
– The first baby boomers in the US (born in say 1935, No, NOT 1945) started to retire around the year 2000 (=1935 + 65). That’s why the labour participation rate AND median household income peaked in/around the year 2000. (think; Harry S. Dent).
– The biggest amount baby boomers were born in 1961 and had their peak in spending in/around the year 2007/2008. (think: Harry S. Dent).
– And an economy revolves around spending (think: J.M. Keynes).
– Which companies have A LOT OF debt ? Is that cash concentrated in a few companies ?
– Yes, a crash is coming. Think: (Stock) Margin Debt is at a record.
“However, a liquidity-driven crash similar to 2008-2009 does not seem likely.”
An excellent, thoughtful post.
I am wondering when the ‘top’ will be in. Not that it matters as short sellers aren’t likely cash in much on a slow decline.
Mark Hulbert had a piece in MarketWatch this morning that said that, in inflation-adjusted terms, the S&P500 had only eked out a .9% annualized gain in price, so far this century.
http://www.marketwatch.com/story/the-shocking-truth-about-stock-returns-in-this-century-2017-09-22
A liquidity crisis in the U.S. would spread almost instantaneously to the rest of the world, especially considering the role U.S. money markets play in supplying dollar funding worldwide. But over the last decades, banks have been giving each other iou’s saying they could settle accounts in dollars, even though no one in the daisy chain of finance actually could. Trillions and trillions of “dollars” were created overseas without the slightest knowledge of anyone in the U.S., except for the U.S. banks that jumped into the game with both feet when they saw how big the profits were. Then the banks took the claims on those dollars that can never be obtained, and counted them as assets, enabling the creation of ever more “dollars” that could be utilized to generate a tidy profit.The approximately 25 trillion in dollar claims that foreign, especially Chinese, banks have on dollars that do not exist is an issue that is not going away.
It’s all a great big Maiden Lane cesspool of bad paper.
A handful of corporations actually have some cash. Like truth itself, that cash gets kept overseas much in the way Snowden and Assange are kept out of circulation.
https://www.usatoday.com/story/money/markets/2016/05/20/third-cash-owned-5-us-companies/84640704/?yptr=yahoo
That’s why I don’t think that declines will be gradual, although Mish may be right – the ability of investors to see the world through rose-colored glasses shouldn’t be underestimated. But the dollar shortage that the big Asian financial systems know all too well is the massive threat that nobody else seems to know about. The bubble of “dollars” on the balance sheets of Chinese, Japanese and Korean banks only needs a strategically placed pin prick to pop, and a plunge in U.S. Stocks will only be a prelude to the final collapse of those Asian economies built on “dollars” and the exports they enable. These countries are using every trick in the book to hide the massive rot at the center of their banking systems, but a liquidity crisis would finally reveal that rot that the gaming of bond and money markets has managed to conceal.
Mish is a storehouse of very good info. But I,m not sure he should be in the predicting business. Predicting is risky business.
I tend to think a recession will trigger a 30-50% draw as usual. Don’t really follow the slow decline view.
Meant to say draw down.
Barring a black Swan event, the vast majority of world economies should continue their growth. The US should continue to grow at 1-2% for several years. I can’t imagine a market “crash” under that scenario.
I agree that the US market is overvalued, but I would expect more sideways action over the next decade as a result.
IMO, Japan then and World now cannot be compared because Japan then had the tailwind from US, China and India (outsourcing of manufacturing and IT services) to fall back on. This enabled pulling forward demand for the last 30 years. This I feel has run its course as everyone who can buy has bought and more. Simply stated lack of demand. Add robots to the mix, joblessness is the result, dampening demand further.
Further central bankers had just started meddling in the markets in 1987 but now they are all in and in concert. How long it can be sustained is anybody’s guess. It is evident that but for the CBs continuous intervention in terms of actions and words the market would not have reached the heights it has. Now they are caught in their own web. Whether they can (or want to) do it for next 3 decades is questionable given that they are feeling the heat now itself despite their self-proclaimed victory. My guess is they are now waiting for a moment when they can let the market fall and not get blamed for it (your North Korea actions fits the bill).
In short, when you have a situation where demand is going nowhere and a fragile financial system supported by our present day Atlas, the central bankers, a market crash is more likely than a long drawn out Japanese one.
Look at Japan. A slow crash is possible. A large ‘crash’ could be many years away.
Something’s amiss in the argument. The current expansion is due to fed money, let us assume that. Starting next month, fed will begin to take the money out of circulation, so to speak. This should lead to a slowdown of start ups and their ads. This in turn should hurt revenues of Facebook and google. Also, with a lot of start ups gone, wealth effect should make people poor and spend less. This in turn should hurt other companies.
In general, how do we reconcile the fact that the stock market ride up was due to liquidity from Fed but when the liquidity goes away, the market stays up? In terms of financials, what really changed? I can see investor sentiment that Fed will come back holding up the market for a while, but even there reality should sink in, if no shock happens.
Why will the stock market stay up, even if the companies are sitting on cash?
Yup! The central banksters have woven a holy mess from which they cannot extricate themselves without leading to a crash. The fun part now is if they do not extricate themselves now, the mess will become worse and they will get blamed for it and it may come about that citizens will take the pitchforks to them. I am damn sure these guys will be praying for the ‘Rocketman’ to do something that will enable them to lay the blame for the crash at his door. It is likely that at this juncture that is all they care about. (I tend to agree with this… https://wolfstreet.com/2017/09/13/you-should-take-the-fed-at-their-word/)
The only way out is crash and burn. This kind of artificial life support of the bond and stock market with all the central banksters in concert cannot continue for ever (not even another decade).
It’s called GLOBAL capital flows. The majority, which always must be wrong, thinks linearly and ignores the rest of the world. Where else is global investment going to go when Japan/yen and EU/euro implode?
@Mish,
I’m confused about why there can’t be a liquidity crisis again… corporations have “record amounts of cash on hand” – over seas. They keep it offshore to avoid the tax hit when they repatriate it… but doesn’t that mean they wouldn’t be able to use it for bond payments either? i.e.: they really only have ~60% of that cash once they repatriate..
Most of the companies truly holding lots of cash overseas are the genuine cash cows. Google, Apple, Microsoft are in that group.
A liquidity crisis is possible for other reasons I suppose but is unlikely to affect everything. Likely targets are companies with covenant-lite bonds rather than the entire market as happened in 2008-2009.
Mish, what odds would you give for the DOW hitting 33,500 before it hits your target of 16,022 in 5 yrs?
That’s a reasonable question
Call it 20%
But I was really referring to the S&P not the DOW.
The DOW is a silly price-weighted index. It would be at 35K now if Apple was included a bit earlier.
While I would prefer to use the DOW, I will make you what ever bet you want to make that the S&P 500 will be 50% higher from Friday’s close (2502), which would be 3753, before your target of 1794 in 5 yrs is hit. That’s a 50% rise versus your 28.3% decline. Since you said the odds are 20% of my target getting hit, I would expect you dont have a problem with 5 to 1 odds. If you accept my offer, I will provide my rationale.
When I refinanced my mortgage, my bank asked me for a statement of my 401k.
A 401K is a lot like cash sitting in a company’s foreign subsidy. Yes if I got into deep trouble, the bank knew I could take money out of my 401K. But they also knew it would come with a huge tax bill. So if my 401K has $300K in it and my debt is $300K it isn’t exactly the case that my debt is backed fully by cash. However it is undeniable that a loan to me would be safer than a loan to someone else who looked exactly like me financially except for having a 401K.
Now something Mish seems to ignore, if a company has the equivalent of my $300K sitting in a foreign subsidy, that likely means they are earning a regular cashflow from their overseas operations. So that doesn’t really answer the question of why they wouldn’t seek to expand rather than just buy back stock? Just like I used the 401K to get a better mortgage rate, any US company could use that foreign cash hoard to borrow to expand domestically without having to actually tap into the cash and incur a tax penalty.
Recall Maria Bartiromo repeating that line about cash on the sidelines, extolling this market rally has much more to go. circa 2000
You’re right Mish, but your tweet to Lisa wasn’t very nice.
Mish, I would suggest that your math is incorrect. If you think that a 40% to 60% net decline is coming, then I believe that you mean that the market is 100% overvalued, not 50%.
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For those companies with overseas cash, isn’t the reason for the shell game taxes.
For example, if I had $1 million taxable dollars, wouldn’t I want to lend Eurodollar bonds, and then borrow the same amount here? Earn and pay about the same amount in interest, but no tax liability, in fact a deduction?