Mark Spitznagel Crushes The "But, Balance Sheets Are So Strong" Fallacy

Tyler Durden's picture


Off the top, Universa's Mark Spitznagel explains that "high-frequency traders are making markets more jumpy" and the idea of HFT as a liquidity provider is a fallacy since as he notes "that liquidity won't be there when they most need it," especially when there is one-way order flow such as in the flash crash.

Spitznagel then crushes the 'cash on the sidelines' meme but explaining that while corporate cash balances have soared, net debt has actually gone up beyond the highs of 2008. As we have previously discussed, "the idea that corporate balance sheets are so strong right now is entirely wrong," as investors are conveniently focusing in one piece of the balance sheet (assets not liabilities).

Maria B just can't fathom it but Spitznagel's words are clear - scale the cash on the balance sheet against debt and we are as bad as we were in 2008.

The fallacy of cash piles on the balance sheet meaning strong balance sheets...

US companies are carrying far more net debt than in 2007


Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.


In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

At 3:00 in the clip below, Spitzangel explains as succinctly as we have heard why the Fed's actions are crushing the Capex growth hopes... when interest rates are so artificially low, "we get more impatient" and scramble "doing stupid things" to make what feels like a natural return (despite the Fed's unnatural thumb on the scales).

Of course we have explained this won't end well...

US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.


Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.

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Thu, 03/06/2014 - 18:08 | 4518897 Seasmoke
Seasmoke's picture

Haven't seen her in a very long time. Has Maria grown a lisp ?????

Thu, 03/06/2014 - 18:34 | 4518981 TruthInSunshine
TruthInSunshine's picture

Publicly traded corporations have been stacking massive debt for the last 4 1/2 year to the tune of MANY trillions USD by selling low yield bonds (thanks, Bernank!) and then using the revenue to buy their own shares back (adding to their debt but making execs on compensation-based-on-share price-performance very happy - fantastic for insiders who cash out before the bust, yet narrowing the exit doors even more so & mandating even larger spreads between the bid & ask on those special fire sale days to come).

But it's different this time until noone could've seen it coming!

Margin Debt, Bitchez.

*Speaking of "balance sheets":

News Headline Summary

US Fed balance sheet liabilities rose to USD 4.129trl (week ended March 5th) vs. Prev. USD 4.117trl

Thu, 03/06/2014 - 21:16 | 4519589 Herd Redirectio...
Herd Redirection Committee's picture

Damn, you beat me to it!  Share buybacks, when the market is at an all time high, and low cap ex, is all you need to know about the quality of earnings (per share), and future (organic) growth prospects.

Fri, 03/07/2014 - 08:06 | 4520508 clooney_art
clooney_art's picture

Who cares about debt these days in this "print and bail out" nation ..

Fri, 03/07/2014 - 02:46 | 4520254 Antifaschistische
Antifaschistische's picture

My interpretation:  

Executive suites are fleecing their companies, buying Ferrari's with easy money from the Fed knowing the party will one day end...but not caring.  As long as you're building the 10,000 square foot homes along Memorial Drive in Houston....and paying cash for them, nothing else in the world matters.

Thu, 03/06/2014 - 18:43 | 4518908 Thought Processor
Thought Processor's picture



And in other News....  


Someone tell this guy that there's a fight brewing out back and everyone that matters has gone out to watch it.

Thu, 03/06/2014 - 18:25 | 4518970 Motorhead
Motorhead's picture

I'll take Liz Clamon over Maria any day...if I had a choice, of course.

Thu, 03/06/2014 - 18:46 | 4519028 Larry Dallas
Larry Dallas's picture

Liz has a AAA-rated rack bunch of assets that keeps the folks like Warren Buffett coming back to her.

But she is so cheesy with her shilling, it gets to be kinda' annoying. Oy vey...

Thu, 03/06/2014 - 21:18 | 4519597 Herd Redirectio...
Herd Redirection Committee's picture

I still remember the newscaster (I think for CNN) on 9/11.

Rudi Bakhtiar.  Hello!

Thu, 03/06/2014 - 18:16 | 4518935 Rainman
Rainman's picture

Mr. Efficient Market loves fraud .... er, financial engineering.

Thu, 03/06/2014 - 18:18 | 4518936 Rainman
Rainman's picture


Thu, 03/06/2014 - 18:20 | 4518949 fonzannoon
fonzannoon's picture

Listen to Maria at 2 mins and 15 seconds in. She is a clueless retard.

Thu, 03/06/2014 - 18:31 | 4518980 Ham-bone
Ham-bone's picture

Fonz - I literally cannot watch. The constant disinformation campaigns have left me feeling ill simply at the mention of these front persons.  It's like she spews venom that goes straight to my nervous system.

Thu, 03/06/2014 - 18:34 | 4518994 fonzannoon
fonzannoon's picture

I hear you. That clip actually makes her less evil and more stupid. Of course in her ignorance she sides with her corporate masters. 

Thu, 03/06/2014 - 18:49 | 4519041 Spastica Rex
Spastica Rex's picture

She makes me think of the church lady.

Thu, 03/06/2014 - 18:59 | 4519075 DavidC
DavidC's picture

I'm with you both. She's like a parrot reciting something with no understanding of what it's saying.


Thu, 03/06/2014 - 18:29 | 4518983 Motorhead
Motorhead's picture

I think she had a rough night last night.  Tequila shooters?

Thu, 03/06/2014 - 18:36 | 4518998 skwid vacuous
skwid vacuous's picture

If I had a quarter for every guy she blew on the floor, I wouldn't be driving a Pontiac

Thu, 03/06/2014 - 19:00 | 4519077 DavidC
DavidC's picture

Is that fact or supposition?


Thu, 03/06/2014 - 20:21 | 4519372 Pure Evil
Pure Evil's picture

More like Kentucky windage.

Thu, 03/06/2014 - 22:52 | 4519874 raeb
raeb's picture

Don't tell anybody, but reading this stuff is the best entertainment you can get. 

Thu, 03/06/2014 - 18:21 | 4518952 pndr4495
pndr4495's picture

I cannot recall the title of the film but I clearly recall the scene from an old black and white movie where there is a harried old broker surrounded by phones all ringing off the hook at the same time - he answers one of them - VOICE FROM PHONE : Sell XYZ Company now - HARRIED BROKER : Sell it , SELL IT TO WHOM !!!!

Thu, 03/06/2014 - 18:21 | 4518953 nightshiftsucks
nightshiftsucks's picture

No that can't be true,I said that to the financial advisor having meetings at work,he said I was mistaken.

Thu, 03/06/2014 - 18:21 | 4518955 Born into this
Born into this's picture

At this point, it would be a good idea for the neg heads (of which I am one) to STFU. NewChairSatan and colleagues in US and elsewhere need no encouragement, and the rest of us do not need reminding.

I for one am so freaking bored of this I actually enjoy this Ukraine shit just for the outside chance it will shake things up. And dat not good!

Thu, 03/06/2014 - 20:26 | 4519387 NoDebt
NoDebt's picture

The good news is that when the next collapse trigger is tripped, it will be from somewhere few are looking.  So, it's OK, you won't feel a thing.  Like a bug hitting a windshield you'll be alive... alive... alive... dead.  Lights out, no pain, no tears.

Thu, 03/06/2014 - 18:26 | 4518975 Motorhead
Motorhead's picture

Cash on the sidelines...yeah, of course, Maria, of course.

Thu, 03/06/2014 - 18:33 | 4518988 skwid vacuous
skwid vacuous's picture

Krudlow was spewing the same garbage the other night showing debt to equity chart since 2007 or so , it helps when the denominator is up 300% thanks to QE

Thu, 03/06/2014 - 18:36 | 4519001 lasvegaspersona
lasvegaspersona's picture

sounds about right

Thu, 03/06/2014 - 18:40 | 4519015 papaswamp
papaswamp's picture

Graph porn for you trend fans....

Thu, 03/06/2014 - 18:49 | 4519044 Ham-bone
Ham-bone's picture

that's some nasty stuff...looks like we'll be taking it in the backdoor again soon...I anticipate the Fed will continue supplying the date rape drugs

If only there was a handy dandy detector to avoid Janet having her way with this...

Thu, 03/06/2014 - 19:00 | 4519078 Pee Wee
Pee Wee's picture

Headline:  Mark sees obvious.

The only that agree that what the world has is a functional market are all insiders and bankers that are neck deep in the racket.

Word around my parts is nobody trusts anybody that has ever touched money professionally.  So-called "investments" have already been liquidated for just about anything big kids could want, like collectables and houses...   Anyone under 30 is avoiding money (including jobs, savings, you name it).

Thu, 03/06/2014 - 19:50 | 4519237 Spungo
Spungo's picture

Maria has been looking sick lately. Her face is a bit pale and she looks tired. I hope she's doing ok. I would like to see her turn into a Barbara Walters character who asks everyone about their sex life even though it's a financial show.

Thu, 03/06/2014 - 20:12 | 4519331 Stanley Lord
Stanley Lord's picture

Looks to me like she had lip implants, when she gets tired and speaks too fast, she gets the lisp, it comes and goes.

Thu, 03/06/2014 - 20:24 | 4519379 rosiescenario
rosiescenario's picture

Borrow money, buy back stock, make $$ on ones' options, dump resulting stock & repeat.


So, at the end of the day, the shareholders end up with a debt laden corp. and the mangement retires as millionaires thanks to their stock options.

Thu, 03/06/2014 - 20:58 | 4519516 mobydick
mobydick's picture

How much debt have we got off balance sheet, courtesy of ever obliging auditors. Not to forget, of course, ever obligiing regulators.

Thu, 03/06/2014 - 22:16 | 4519784 Ban KKiller
Ban KKiller's picture

Elephant that is never mentioned. For good reason! 

Thu, 03/06/2014 - 21:10 | 4519564 CURWAR2012
CURWAR2012's picture


Thu, 03/06/2014 - 22:18 | 4519780 Ban KKiller
Ban KKiller's picture

I don't want to know..

Thu, 03/06/2014 - 22:15 | 4519781 Ban KKiller
Ban KKiller's picture

Her accent is a little strange...Easty. She looks ok to me...

Don't know what the rest of the body looks like behind and under the desk.


Thu, 03/06/2014 - 21:12 | 4519574 chirobliss
chirobliss's picture

Stupid, stupid man!! If you don't like the interest rate, buy Aussie bonds! Of course you will come crying when the capital value of your Aussie dollars falls by 10 % in a month!

It's not fair, wah, wah, wah...

Thu, 03/06/2014 - 21:19 | 4519600 Kreditanstalt
Kreditanstalt's picture

So 1950s ~ how many anyway people even work for "big companies" now anymore...?

Most people seem pretty precariously part-time, contract work, government handout, stay-in-school, service work types... 

Thu, 03/06/2014 - 21:24 | 4519620 IREN Colorado
IREN Colorado's picture


<sarcasm setting on>

Wha'?? You mean when the Government gets involved the exact opposite to what they intended always happens? 


<sarcasm setting off>

Fri, 03/07/2014 - 01:31 | 4520201 q99x2
q99x2's picture

Fuckin Aye. Now I've heard everything.

Balance sheets are publicly available information. WoooooHoooooo.

Yipeeee ey yippy yip yippy yip yip yip.


Fri, 03/07/2014 - 03:38 | 4520304 SharkBit
SharkBit's picture

God Maria has got to get off the airwaves.  Really tired of seeing her ugly face and having to listen to her annoying voice.  Stick to bowing CEOs Maria.

Fri, 03/07/2014 - 20:49 | 4523582 rex-lacrymarum
rex-lacrymarum's picture

'Cash on the sidelines' = Myth. Are there any unowned stocks? Someone always holds all cash, and someone holds stocks. If/when they trade, both change hands, and there is as much cash on the sidelines as before. 

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