Still Can’t Find That Pitchfork, Can You?

Corporate balance sheets have never been in the condition they are now, but most of this is a fraud.
Virtually all of the so-called “growth” has been in buybacks and (to a lesser extent) dividends. The problem with buybacks is that into ramping prices they are a terrible long-term deal. They make some sense in the depths of a crash, but of course nobody has the cash to do it during a crash.
When debt financed it’s even worse because history says that corporate debt is never paid off, only rolled over. In point of fact non-financial companies did not decrease their total debt levels (as measured by the Fed Z1) even during the depth of the financial crisis of 2007-2009. This of course means that debt:equity levels go vertical as soon as the ramp in equity price stops.
I remind you that while buybacks increase earnings during good years (by reducing the divisor) they also increase losses during bad ones. People forget this because, well, there haven’t been any bad ones recently. That will end and when it does it will provide a gross amount of acceleration for the decline in equity prices. In fact, it’s not going to be gasoline poured on that fire, it’s going to a mixture of diesel fuel and ammonium nitrate…. See Galveston for what will come of that.
But on top of this we now have the real screw job in the tax bill.

This post was published at Market-Ticker on 2017-12-15.

 

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