Is This What a Credit Bubble Looks Like?

Tyler Durden's picture

Submitted by F.F.Wiley via Cyniconomics blog,

There’s been some buzz recently about a pick-up in business lending. The six largest banks increased business loans at an average annual rate of 8.5% in the first quarter, according to a Wall Street Journal report last week. Other first quarter data reported by the Fed shows commercial and industrial loans jumping 12% from last year. Charles Schwab’s chief strategist went so far as to call a chart depicting the Fed’s broader lending data “the most important chart in the world.”

Unlike some pundits, though, we’re not convinced that a surge in business credit is such a good thing. We don’t doubt that more lending to small businesses, in particular, might do some good if it doesn’t go too far. Lending to large corporations, on the other hand, is a different story. Corporations are already borrowing at a pace that’s only before been seen near cyclical peaks:

debt to asset 1

At over 4% of GDP, you might say that borrowing is too high, not too low, especially as this pace never lasts long. The bigger issue, though, is that companies are choosing not to invest borrowed funds back into their businesses. You may have seen recent posts by David Stockman or Tyler Durden, breaking down financial statements for IBM, in particular. They showed that IBM’s borrowing in recent years was matched almost exactly by stock buybacks. Clearly, this isn’t the kind of borrowing that helps the real economy, and IBM’s not alone.

We’ll take a broader look at the use of borrowed funds with the Fed’s flow of funds data, which includes a measure of the internal funds generated by all US corporations. We add the internal funds figure (with an adjustment for dividends) to corporate borrowing to estimate the cash that’s available for all purposes: capital expenditures (capex) versus acquisitions, dividends, buybacks and other financial strategies. Normally, capex accounts for between 2/3rds and 3/4ths of the total. Here’s the latest update:

debt to asset 2

Needless to say, attitudes about capex aren’t quite what they used to be (see here for more discussion). Financial engineering now consumes almost half of available funding, with the implication that companies are piling more debt than ever before on each dollar of productive assets. Although debt-to-asset ratios for the broad corporate sector aren’t yet available for 2013 (the BEA doesn’t update fixed asset data until August), we can make a decent estimate using fixed investment data. Here’s a 60 year history with our 2013 figure tacked onto the end:

debt to asset 3

We pegged the debt-to-asset ratio at 65% in 2013, 6% above the housing boom peak of 59% in 2007. That’s a big jump in a short period of time. By comparison, the ratio also climbed 6% over the 11 years from 1989 to 2000, and barely rose at all from 2000 to 2007. Glancing at the chart just four years ago without the latest results, you might have guessed that leverage was finally leveling off. Apparently not. Together with weak capex, data describes a leverage-earnings-debt spiral that looks something like this:

debt to asset 4

The spiral could continue awhile longer, and probably will, but it’s not sustainable. The longer it circles in one direction, the more strongly it circles back in the opposite direction once the inevitable cracks appear in credit markets. In other words, not only does the spiral explain much of what we’re seeing in today’s financial markets, it also describes part of the process that leads to the next recession.

When will the debt super-cycle end?

What’s more, the data also begs the question: When does the roller coaster of leverage peaks and troughs fly completely off the tracks? The idea that we may be in the late stages of a debt super-cycle isn’t welcome in some circles, but the fact is that leverage can’t trend upwards forever. Eventually, we’ll reach a point where the normal reflation no longer works. We may then begin a secular downtrend (as in the period from the Great Depression to World War 2) or, at a minimum, we’ll establish a sideways pattern that fails to make new highs. Either way, the business cycle won’t look quite like it did over the last 70 years of rising leverage, nor will it look like the last few decades of increasing financialization.

Back to the question, can companies lever up as much as, say, 70% of assets? 75%? Maybe so, but it says here that the super-cycle ends well before debt reaches 100% of assets. It’s hard to say exactly where the breaking point is, but we’ll continue to share clues as we find them. In the meantime, one clue may be the bursting of the mortgage bubble in 2008. As you look at the last chart below, keep in mind that residential mortgage debt (backed by properties) and corporate debt (backed by productive assets) are fundamentally different. Or, maybe they’re not so different? You decide.

debt to asset 5

Sidenote: Regular readers know that we’ve already taken a position on critical thresholds for government debt. See our Fonzie/Ponzi theory and follow-up posts here and here.

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ZeroChance's picture

it's all feeling really TOP-y

TruthInSunshine's picture

Yes. It really is.

And this is what the 2nd wave of looks like: Commercial

*This commercial is real, as is this company. I repeat. This isn't a parody nor material produced by The Onion.

BandGap's picture

This site as been around for years (started in 2005). Hoe-key yes, bu it survie h crash.

I saw these ads years ago. Interesting if you're looking for a strapping woman.

TruthInSunshine's picture

The real crash hasn't yet happened. BernYellen monetary policy kicked the can down the street 27 feet.

Real inflation on necessities of life (food, energy, housing, etc.) is building rapidly and will be the catalyst that triggers the next crash, which is much closer than many either admit and/or realize.

Compare real wages with real inflation on INFLEXIBLE (i.e. necessary) costs of living & spot the massive gap between these two metrics.

Once again, the central planners have unleashed a forced debt tsunami upon the masses, and the drowning has merely begun.

Whatever can't be sustained, isn't sustainable.

There's little doubt in my mind that real inflation on necessities is now running at at least 7% annualized, and this is before one considers the higher tax-flation, regulatory-flation, health care impacts & other increased costs of living just now starting to kick in.

This is why discretionary is getting murdered in the real economy & the pain has only just begun - we're going to see a watershed moment & historic, structural shift in spending on necessities vs discretionary goods/services unlike anything in our lifetimes in the near future (it's already underway).

Max Damage's picture

Just print Moarr ya fuckers

NoDebt's picture

Keep handing out free money and it will continue to be accepted.  Just that this time the free money offer to individuals (home equity as their personal ATM) has been rescinded.  Everyone else, it's the same tune all over again.  Just wondering which leg of the stool gets sawed off after the NEXT crash.

BandGap's picture

From an earlier post - Starbucks takes EBT now? The end is neigh, everyone has their hand in the pot

mumbo_jumbo's picture



uncle Sam is more than happy to pay for increased sales for Starbucks.

TruthInSunshine's picture

Starbucks AND Whole Foods let people swipe their EBT/SNAP cards.

Nothing says Supplemental Nutrition Assistance Program like a Vente triple mocha latte for $8.

LawsofPhysics's picture

perpetual motion machine...

good luck with that.

Major Major Major's picture

Rising EPS and Stock Prices in Just Two Easy Steps!

prains's picture

....they're shooting for the perpetual ponzi machine


pun intended

NotApplicable's picture

Nary a mention of ZIRP ushering in the "New Normal."

mayhem_korner's picture



Why is corporate borrowing so high if they are generating record profits?  Inquiring minds want to know.

Rainman's picture

These bastards are rehypothecating debt again

RafterManFMJ's picture

Very simple.

I'm in the C-Suite. I have millions of dollars in stock/options. I and my cronies all vote to buy / retire company stock with cheap debt.

EPS goes up, looks good, stock price goes up. We all sell and our stocks and get bonuses for increasing 'share holder value.'

We take our new money and buy mansions, and politicians.

Then we drink and laugh maniacally.

disabledvet's picture

"And then comes the napalm strike on your fat pig house and all your bullshit."

LawsofPhysics's picture


You really believe the CEOs of the MIC companies don't to the same thing?

Stupid fuck.

TheReplacement's picture

They are financing stock bybacks at all time highs.  Very stange.

giggler321's picture

Nice looking compression spring, now if only I had not of dropped out of mechanial design class I'd be able tell you when it would break :)

buzzsaw99's picture

greater access to cheap credit --> higher stock prices --> bigger insider bonuses

disabledvet's picture

"Until spreads flatten and commodity prices collapse."

In other words "a plain vanilla recession."

Since however interest rates can't be "monetized" anymore that means anyone long recovery is staring "a wave of defaults unlike anything anyone has ever seen" right in the face.

In other words you can print a nice balance sheet into existence, but you can't print a recovery.

"Now prices have collapsed" and if this leads to an uprising of some sort..well, let's just say your gallon of milk is gonna cost more.

order66's picture

"The essence of the Ponzi scheme is not statistical; it is psychological. It creates belief in that which is statistically impossible, and the degree of belief is so strong that anyone who points out the statistical impossibility of the scheme risks being cut off personally by the victim...

The essence of the Ponzi scheme is that it is like an addictive drug. Once someone enters into it, he finds it psychologically impossible to face the reality of the unsustainable statistics of the program."

- Gary North

WhyWait's picture

But with the big players exiting the stock market while corporate buy-backs fueled by the Fed keep driving it up, this is only a Ponzi scheme for the rest of us.  Mr. Ponzi is busily taking his profit and exiting stage right.  

So where does he put it?  Has he thought *that* through? 

prains's picture

.... he puts it in militarized "security" forces, essentially another form of buy back paid for by the taxpayer


in this game we get it coming, and going.....and pay the bill as well, it's brilliantly conceived and executed if you really analyze it. so entirely fucked up you'd think an alien race is involved

disabledvet's picture

"And I've got a hot secretary...and she can handle a loaded weapon too." Ollie North.

NOTaREALmerican's picture

Corporate debt as a percentage of GDP:  What percentage of GDP is debt?

But, really, who cares.   More debt is good, because in economics more of everything is good. 

More,  it's what an economy needs.

More,  because you deserve it. 

More,  because it's better than less.

More, ________________________

slightlyskeptical's picture

On the heels of the 5 year bull market, tax collections should be very good this year. Just like in 1999-2000 when it lured us into a false sense of running at a surplus. This news could help postpone any major drop in stocks.

cougar_w's picture

Thread jack!

I feed bubblemiester Paul Krugman to an eff'n tiger:

Warning: contains discussion of macroeconomic theory, and homicide.