Trader: The US Has A "Grotesque" Debt Problem

The last time SocGen strategist Andrew Lapthorne commented on the extent of the massive US debt problem, was back in November when the outspoken analyst didn't hold back as usual, emphasizing "risks associated with highly leveraged US companies, particularly among the smaller capitalisation names" and warning that "US corporate leverage is abnormally high for this stage in the cycle and a handful of cash-rich mega caps are masking significant problems elsewhere."

Lapthorne calculated that while on average interest cost as a % of EBIT remains very healthy - as one would expect with record low interest rates - "once you peel away the biggest and strongest US companies, the picture is entirely different." As shown in the chart below, and as Lapthorne notes, "interest coverage for the smallest 50% of US companies is near record lows, at a time when interest costs are extremely depressed and when profits are at peak."

Five months later, short-term rates have risen by nearly 100bps, and Lapthorne is back with yet another warning, telling Bloomberg that rising "interest rates are already doing damage, people just haven’t noticed."

He then focused on his favorite topic, the record amount of debt in the system in general, and the US in particular, and said that "leverage in the U.S. is grotesque for this stage of the cycle. At the moment you’ve got peak leverage at peak prices. It’s not like you have to dig deep to find a problem."

During the Bloomberg interview, Lapthorne explained that while the number-one conversation his bank has with clients right now is about the correlation between bonds and equities, he said that risks to corporate balance sheets is a bigger problem at the moment, particularly in the U.S. and China; the SocGen strategist also said he worries about volatility in debt "because of the impact it can have on the economy, particularly how it weighs on businesses and the job market."

Ignore the recent bond market stability, Lapthorne said that credit markets would likely get choppier due to triggers like high-profile bankruptcies, such as Toys ‘R’ Us, or if corporate buybacks drop, something we discussed over the weekend as a distinct possibility should rates continue to rise. None other than Goldman Sachs' chief equity strategist said last Friday that he saw buybacks becoming “less constructive” in 2019.

Of course, regular readers will recall that the Societe General strategist doesn’t see buybacks as a panacea for markets; after all it was Lapthorne who first pointed out in 2015 that all the net debt proceeds this century had gone to repurchasing common stock.

He said companies that announce buybacks but don’t follow through outperform those that do. The average loss from share repurchases is about 5%, Lapthorne estimates. To him, the action of borrowing money to get a short-term boost in earnings-per-share is often motivated by executive compensation in the U.S.

"The performance differentiator in the U.S. stock market has been an aversion to buying companies with bad balance sheets," Lapthorne said; that differentiator will only become more pronounced as rates rise, sinking deeply indebted companies.

Lapthorne had one more concerns about the direction of the markets as well: “Instead of the usual market driver of economic growth, this bull market has been driven by valuation growth,” Lapthorne said, adding that confidence in asset prices is deteriorating as volatility has risen. This explains events like the February 5 "volocaust" when in the span of just a few hours amid a broad inflation scare, the market had to reprice the absence of central banks propping up stocks, resulting in one of the fastest bear markets on record.

Comments

sabaj49 Pinto Currency Wed, 04/25/2018 - 18:21 Permalink

one by one they are starting to realize that exponential debt will cause

collapse of all fiat currencies - only way to pay for it with cheaper $$$$

then again I FOR ONE DECLARE IT IS NOT MY DEBT and I will not be held responsible for it(though we'll all -99% that is - pay for it with collapsed country)

 

govt debt - IMHO it is 100% fraudulent and odious and therefore NULL AND VOID

debt jubilee everyone???

In reply to by Pinto Currency

hongdo sabaj49 Wed, 04/25/2018 - 19:45 Permalink

Why would you give the US govt debt forgiveness?  Think it through.  You must not have any bond investments you would like paid back.  I would argue that the debt must be paid even if in unconventional ways:  tax free years, loan of a congressman to mow your lawn, distribution of govt owned land,  allow you to set up economic free zones, give you a tank or jet.  Use your imagination.

In reply to by sabaj49

wetwipe The central planners Wed, 04/25/2018 - 17:35 Permalink

Not only America..... every 'western' nation has got lazy and fat on ZIRP/NIRP cheap money. It's like when you step outside and the air feels a little different and you know for sure a massive storm is coming.

IMO 90%+ of people will be very poorly equipped both physically, mentally and financially to deal with what is due any day now. Time  "to get smart and streetwise" people.

 

We live in truly hellish times.... Thank god for my support group on FaceBook.

In reply to by The central planners

wetwipe dirty fingernails Wed, 04/25/2018 - 17:59 Permalink

No.... It has actually been proven via scientific study that cats are institutionally racist and highly transphobic AKA Nazis.

 

Basically our support group on FaceBook is a group of likeminded narcissistic psychopaths who have decided that porn is inferiour and now when we masturbate we do it whilst looking at vision of ourselves in a good sized mirror.

 

We live in truly hellish times.... Thank god for my support group on FaceBook.

In reply to by dirty fingernails

uhland62 The central planners Wed, 04/25/2018 - 20:52 Permalink

The war machine could well bankrupt us all. As the US overspends they will increasingly turn to allies to pay and not stop until they have wrung every drop of blood from all of the 99 % on earth.

The prospect that we should all live as pavement dwellers is not so good and every attempt to soften the blows from America's love for overspending on power is welcome. It may not do much but at least he/she won't live in the gutter, remembering 'I did not say anything'. 

In reply to by The central planners

Yen Cross Wed, 04/25/2018 - 17:41 Permalink

  Andrew needs to take a couple more laps around the trading circuit.

 The whole fucking world is a "grotesque" debt problem, you dolt!

  China, Japan, South Korea, Hong Kong, EM's, Middle East, Europe,, South America, are all asses and elbows deep in fiscal mismanagement, and corrupt retards that pose as leaders.

  Based on the vernacular, Andrew is a scum sucking U.K. retard. [or some aberration of one]

Paul Morphy Yen Cross Wed, 04/25/2018 - 18:10 Permalink

Which means that if one falls, the rest falls too.

$75 trillion of debt has been added since 2008 debt crisis. That is $75 trillion of sovereign debt, bank bailouts, corporate bailouts, personal borrowing, municipal borrowing.

Issuing more debt to repay legacy debt, and all supposedly to keep the show on the road.

 

The level of indebtedness cannot be repaid.

Nor can those owed forgive that level of indebtedness.

Something has got to give.

 

 

 

In reply to by Yen Cross

Paul Morphy Yen Cross Wed, 04/25/2018 - 18:11 Permalink

Which means that if one falls, the rest falls too.

$75 trillion of debt has been added since 2008 debt crisis. That is $75 trillion of sovereign debt, bank bailouts, corporate bailouts, personal borrowing, municipal borrowing.

Issuing more debt to repay legacy debt, and all supposedly to keep the show on the road.

 

The level of indebtedness cannot be repaid.

Nor can those owed forgive that level of indebtedness.

Something has got to give.

 

 

 

In reply to by Yen Cross

Argenta Wed, 04/25/2018 - 17:47 Permalink

I agree with just about every prior post here.  This is news?  No wonder precious metals markets are so easy to manipulate: the average American is an uninformed boob.

-Argenta

venturen Wed, 04/25/2018 - 18:00 Permalink

social losses, private profits.....this is as designed.....taxpaying bag holder has NO CLUE....votes for gender neutral bathrooms and how black the candidates skin is

GreatUncle Wed, 04/25/2018 - 19:15 Permalink

Should have fucking woken up when the US in the 70's refused to honour its currency in gold.

Fucking obvious after that there there was too much paper and somebody had been lieing.

Well wakey-wakey the problem was growing since then because nobody stopped the fraud.

 

Yen Cross Wed, 04/25/2018 - 19:47 Permalink

  Who wants to short some usd/jpy with me?

 I'll risk 60 pips to the 200 day sma and then some, with some serious German macro and U.S. GDP data coming up in the next 48 hours.

  That's decent R/R based on the chart extensions.

pitz Thu, 04/26/2018 - 01:56 Permalink

Well no shit.  This is why the US stock market performs like shit during rising long-term interest rate environments.