SocGen: "Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets"

Tyler Durden's picture

With the ECB now unabashedly unleashing a bond bubble in Europe of which it has promised to be a buyer of last resort with the stronly implied hint that European IG companies should issue bonds and buy back shares, and promptly leading to the biggest junk bond issue in history courtesy of Numericable, it will come as no surprise that the world once again has a debt problem.

For the best description of just how bad said problem is we go to SocGen's Andrew Lapthorne, one of last few sane analyzers of actual data, a person who first reveaked the stunning fact that every dollar in incremental debt in the 21st century has gone to fund stock buybacks, and who in a note today asks whether "central bank policies going to bankrupt corporate America?"

His answer is, unless something changes, a resounding yes.

Here are the key excerpts:

Sensationalist headlines such as the one above are there to grab the reader’s attention, but the question is nonetheless a serious one. Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today. These central bank policies are having some serious unintended consequences, particular on mid cap and smaller cap stocks.

 

Aggressive central bank monetary policies have created artificial demand for corporate debt which we think companies are exploiting by issuing debt they do not actually need. The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand. The effect on US non-financial balance sheets is now starting to look devastating. We’re not the only ones to be worried. The Office of Financial Research (OFR), a body whose function is to assess financial stability for the US Treasury, highlights corporate debt issuance as their primary threat to financial stability going forward.

 

In our assessment, credit risk in the U.S. nonfinancial business sector is elevated and rising, and by more than depicted in the Financial Stability Monitor. The evidence is broad. Credit growth to the sector has been rapid for years, pushing the ratio of nonfinancial business debt to GDP to a historically high level. Firm leverage is also at elevated levels. Creditor protections remain weak in debt contracts below investment grade. These factors are consistent with the late stage of the credit cycle, which typically precedes a rise in default rates.

 

The reality is US corporates appear to be spending way too much (over 35% more than their gross operating cash flow, the biggest deficit in over 20 years of data) and are using debt issuance to make up the difference. US corporates will have to borrow over 2.5% of their market capitalisation (over $400bn each year) to, somewhat ironically, buy back their own stock.

 

 

This cash flow deficit then needs to be financed, hence the continuing need to raise more and more debt. Current spending implies US non-financials will have to raise another $400bn of debt, a large proportion of which would then be reinvested back into the equity market via share repurchases. Some consider this to be shareholder return, while others (ourselves included) see it as simply remortgaging shareholder equity in an attempt to boost short-term share price performance. This in our view is short-term irrationality.

 

No matter where you look or how you measure it, leverage is elevated and continues to rise to unusually high levels given where we are in the cycle, with the most worrying rise in small cap stocks’ debt levels. Looking at interest cover is not particularly reassuring either, with the weighted interest coverage ratio approaching the recent low of 2009 when EBIT was depressed and not that far off the 1998/2003 levels when corporate bond yields were significantly higher.

 

 

 

The catalyst for a balance sheet crisis is rarely the affordability of interest rates, so a 25bp rise in Fed rates is neither here nor there. Credit market risk is about assessing the likelihood of getting your money back. As such asset prices (i.e. equity markets) and asset price risk (i.e. equity volatility) are far bigger concerns. So all you need for a balance sheet crisis is declining equity markets, a phenomenon the Fed appears desperate to avoid. Now we know why (see chart below).

 

Well that, and another reason: as of this moment one can measure the daily credibility of central banks by whether stocks closed higher or lower; too low and everyone starts talking about how CBs no longer have credibility and how they would rather Yellen et al would stop micromanaging everything... and then everyone quiets down when stocks surge back to all time highs. Alas, this means that the markets have not only stopped being a discounting mechanism (or rather they only discount what central banks will do in the immediate future), but have also stopped reflecting the underlying economy a long time ago, something will remains lost on all of the "smartest people in the room."

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Bill of Rights's picture

Its all about the Pensions....

wee-weed up's picture

Yep, Janet & Barry were hatching their devious plans for us lowly serfs during their meeting in the White House yesterday.

JamaicaJim's picture

Two criminal cunts yukking it up - front running to all their friends, and Barry's butt buddies.

I have NO doubt they do this daily - routinely.

The Rule of Law? LOL....only for the serfs.

I hate Fuckbama - the prick.

Yellen? Hated that Yoda-bitch ever since I learned of her "appointment" to the Fed.....the ugly cunt.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) JamaicaJim Apr 12, 2016 2:57 PM

I hate it when people reveake things.

Money Counterfeiter's picture
Money Counterfeiter (not verified) LowerSlowerDelaware_LSD Apr 12, 2016 3:23 PM

Load people up on debt, pop the bubble and take their shit.  Banking 101.  

Think the fear is these assholes picked on someone bigger than they are who will impale their ass to the nearest tree.

They fucked with the wrong group of people. 

MillionDollarBonus_'s picture

Why would equities fall in price when we’ve had such strong economic growth? We’ve now had a positive string of NFP reports going back over five years. Now if that’s not a sign that we’re in a recovery, I don’t know what is. Worrying about stock prices falling is completely missing the real danger, which is the risk of our growing economy getting overheated and running into a bubble like it did in 2007. We need to be cautious and make sure we don’t let this recovery get out of hand. Right now, our Federal Reserve is doing things just right – we’ve had steady, low volatility stock market returns; not too much growth, but not too little either. And that’s exactly what the science of economics is designed to achieve. Read more about how our economic officials are creating untold economic growth and prosperity using breakthroughs in economic science in today’s article at the Accredited Times:

https://accredited-times.com/2016/04/12/the-science-of-economics-how-eco...

MrTouchdown's picture

Lose your full time job, get two part time jobs and... not profit. Your ONE thing you can cling to is a turd.

old naughty's picture

"it's all about pensions"

so "Janet and Barry" exchanged notes about "boomer benefits", ha.

 

NoDebt's picture

My choice of screen name was not by mistake.

chicaboomboom's picture
chicaboomboom (not verified) NoDebt Apr 12, 2016 10:55 PM

Yellen like Einstein is no genius

https://goo.gl/rcY0QH

Four chan's picture

yellen is woody allen in disguise, close your eyes and listen.

bobsmith5's picture

You will never ever see MDB respond to any of your comments.  I think he is here only to get negative points.  He loves that and enjoys it immensely.

The positive points are from those who think he is the master of satire and sarcasm.  The negative points are from those who know this is pure nonsense and drivel.

I really think this guy is for real because he has a website with more of his insane crap.

We all know that the bullshit he posts is never ever going to change one person mind who regularly comes to this site.

We are two opposite worlds that will never meet and reconcile.

MDB is truly a psychopath and is the prime example of a completely mind controlled programmed human being fully at one with the "Matrix".

 

Proctologist's picture

" right now, our Federal Reserve is doing things just right ..."

The 0.1% speaketh. Vote Hitlery!

/s

BeanusCountus's picture

So lets go through it. "Such strong economic growth"? Surely, you are lost. The slowest "recovery" in history, despite increasing national debt by 4T$ and printing an additional 4T$ in money supply to accomplish 2-3% growth in GDP. Ridiculous assertion. NFP positive for 5 years? Might mean something if you live in China, not so much in US. Labor participation rates remain at brutal lows and real disposable income growth is stagnant for as long as you can measure it. "Low volatility"? Way too early to make that call. We will see. The "science of economics"? Excuse me, but the current policies of central planners violate every single principle of anything that could be considered "evidence" in the history of successful monetary policy. They are trying to write a new book, period. And it is based on hope, not on history. Here's the thing: Economics is not "science". It's not all mathemetical formulas like you want to believe. Human emotion has not yet been put into a formula. And can never be. It will always leave you explaining where your last "theory" went wrong.

bagehot99's picture

In a recovery? The recession ended five years ago (!!), and you're still trying to argue that this debt binge is a recovery? If we're doing so well, why are interest rates almost at zero? Why does a 25bps hike cause a global market meltdown? Why is the national debt DOUBLE what it was in 2008? Why are many serious analysts such as SocGen here, ringing the alarm bells so loudly? 

You're a sad little water-carrier, who is either totally ignorant of basic economic data, or you're a liar. If I were you, I'd keep my head down.

bagehot99's picture

In a recovery? The recession ended five years ago (!!), and you're still trying to argue that this debt binge is a recovery? If we're doing so well, why are interest rates almost at zero? Why does a 25bps hike cause a global market meltdown? Why is the national debt DOUBLE what it was in 2008? Why are many serious analysts such as SocGen here, ringing the alarm bells so loudly? 

You're a sad little water-carrier, who is either totally ignorant of basic economic data, or you're a liar. If I were you, I'd keep my head down.

Shizzmoney's picture

RE

Why is the national debt DOUBLE what it was in 2008? 

Because the military and CIA wanted to start a proxy war using Al-Q vs Gaddafi in Libya, ISIS against Assad in Syria, and with NeoNazis vs Putin in Ukraine.

Wait, you weren't supposed to read that. 

bobsmith5's picture

You will never ever see MDB respond to any of your comments.  I think he is here only to get negative points.  He loves that and enjoys it immensely.

The positive points are from those who think he is the master of satire and sarcasm.  The negative points are from those who know this is pure nonsense and drivel.

I really think this guy is for real because he has a website with more of his insane crap.

We all know that the bullshit he posts is never ever going to change one person mind who regularly comes to this site.

We are two opposite worlds that will never meet and reconcile.

MDB is truly a psychopath and is the prime example of a completely mind controlled programmed human being fully at one with the "Matrix".

NorthernCat's picture

Wow economists have a lobby. Worried about your job security?  You should be.  Taking credit for the federal reserve juicing the market?  Taking credit for companies buying up all that stock that nobody is there to buy-up?  When it collapses I hope the future unemployed economists know how to serve up a good burger.  Hold the mayo.  

venturen's picture

you have it wrong....it would be fine...if people too on too much debt...and they failed and the banker got sshafted. But that isn't what is happening....you load up on debt, you fail....the banking loaning you money is rescued.....and then takes your stuff! 

 

Goldman et al...SHOULD HAVE FAILED FOR WHAT THEY DID...INSTEAD THEY WERE RESCUED WITH PRINTED TRILLIONS...that you owe!

ersatz007's picture

that's because "something will remains lost" on you.  

Cognitive Dissonance's picture

All your bases shit are belong to us.

SweetDougisaTwat's picture

I promise you that your wife, your fiancee, your girlfriend, your sister, or your mother voted for Barry--twice.  You've been done in by women's suffrage, pal.

eatthebanksters's picture

When rates were normalized it was cheaper to obtain inventment and operating capital through selling shares of stock.  With QE and ZIRP is is now much cheaper to obtain investment and operating capital through debt.  Using cheap money to buy back shares strengthens shar value and provides invesotrs with better yields. There are a couple of problems with this.  The first is that as market caps are determined in part by the cost of capital, the caps will go DOWN as the cost of capital goes up. The other problem is that as rates are normalized the debt will cost more and more as it is rolled over.  The end game is where the value of the company dimishes to a point where margin debt will not be reissued...issuing shares at this point is fruitless as well.  When this happens we're totally fucked.

Financial engineering is only as good as the engineers.   Issuing more and more debt to stimulate growth is tantamount to building a mud levee to stop a storm surge tide.  Its only going to hold out for so long; eventually it will breakdown and then you will have big big problems.

Theonewhoknows's picture
Theonewhoknows (not verified) eatthebanksters Apr 12, 2016 2:53 PM

They have to spend. To save banking sector, to save bankrupting energy sector, to finally get out of debt. Problem with this inflationary escape of debt - idea that through increased money supply (gov spending) you can have inflation bigger than your interest rates accrue on your debt - is that you are TAXING everyone with savings through destruction of money. What is more - if you could have some sort of a guarantee that whatever government spends money WILL WORK - you don't have it. If it is a failure, it is huge and I mean bigger than 2008. Now we have many examples of such risks - Auto loan bubble, student loan bubble, S&P bubble not to mention bankrupted governments that can go to war not to pay the debt... 

this is called war on cash. We see it in front of our eyes and it will be bad.  http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html

financialrealist's picture

its everything, the entire system is being supported by financial assets, elevated asset prices is the only thing holding the global economy together. The risk is truly systemic.  watch DB and CS equity and CDS pricing.  they're the canary in the coal mine.  they're front and center on my bloomy. 

Rainman's picture

'According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger. '

                   http://www.ft.com/intl/cms/s/0/c9966bea-fcd8-11e5-b5f5-070dca6d0a0d.html#axzz45dgv1OBL

HardlyZero's picture

We are here now, as we have been led to this point, together.  A herd.  *Agent Smith might say the same*

Firth of Fifth

https://www.youtube.com/watch?v=SD5engyVXe0

 

 

JRobby's picture

Pensions!?!?!  There will be no pensions when this "cycle" has run it's course. The feeble and immobile will be bulldozed into lye coated pits. The rest will go to camp.

Yes We Can. But Lets Not.'s picture

Watch the Jim Mora rant, and replace 'playoffs' with 'pensions'...

http://yhoo.it/1RSP970

 

Phat Stax's picture

...and avoiding civil unrest.

Emergency Ward's picture

Somebody is printing up "Miss Me Yet" posters of Obama's leering physiognomy to be released after they pull the rug out of the next poor sap that ends up in the WH.

PRO.223's picture

That may indeed be happening, but I'll never, ever, miss the scumbag... period!

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) hangemhigh77 Apr 12, 2016 2:32 PM

I'm used to saying "Nuke the gay whales" (but I guess it's the same thing we're talking about here)...

Consuelo's picture

 

 

I can't believe you missed the 'unborn' part...

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Consuelo Apr 12, 2016 6:23 PM

It's hard to keep up when you're actually burning hours in the day WORKING... Trying your best to keep afloat:

 

- The bloated social security entitlements

- The bloated teachers pensions

- The bloated veterans "who I follow every day in a moving vehicle PROUDLY displaying their "I served" bumper stickers alongside their 9/11 "we'll never forget" bumper stickers

- The Free Shit Army (who, instead have OBAMA bumper stickers on their BMW's on their way to their government jobs)

 

I try my best, but it's like a couple of bricks get added each & every day

coast's picture

On another article someone mentioned that obama is going to give yellen her marching orders...and wee-weed says janet and barry were hatching their devious plans....Here is my take.   The rothchilds told janet what to do, and janet had to tell obama what to expect when reading the teleprompter....end of story

JamaicaJim's picture

Oil over $42....Jesus H....

Insanity

bada boom's picture

What, aren't you excited for your next fill up?

Debtpool's picture

Why don't you ever use Mohammed's name in vain?

Publicus_Reanimated's picture

Because he doesn't have a surname.  "Mohammed H." just does not have the same ring as "Jesus H. Christ".

bada boom's picture

Keep running this shit up, the laws of physics and mathematics apply.  That's compounding debt and gravity. It can be a bitch.

To add, the movement in the markets despite fundamentals, or any hint of them, suggests desperation is definitely at play here.

BeaverCream's picture

I'm sure they're working on battle plans for this thing when it collapses. All these 40 something fighting age males with half a million dollars in retirement "money" are going to be really pissed when it evaporates.

besnook's picture

confirmation of of my no crash thesis for loan reserve reasons. there had to be another reason for the magically levitating equity market. it should have crashed a long time ago just as a regular business cycle event. it did in a flash crash sort of recession signal but amzn is back above 600 so everything must be fine and i am, of course, wrong. must think unicorn economics.

cognitive dissident's picture

looks like the the algo programmers are back to work after a 3-day weekend -- it's another Festivus miracle!