Ticking Time Bomb of Record High Corporate Debt

The Fed released its "Z1" report today on Household Net Worth and Domestic Nonfinancial Debt. Let's dive into debt.

Bloomberg reports U.S. Business Debt Exceeds Households' for First Time Since 1991.

With the record-long expansion in its 11th year, Fed policy makers have indicated in recent months that they’re watching the corporate debt situation closely. Chairman Jerome Powell said in October that “leverage among corporations and other forms of business, private businesses, is historically high. We’ve been monitoring it carefully and taking appropriate steps.”

Hello Fed, I have a Question

Uh.. Pardon me for asking, but could you please explain the "appropriate steps" that you have taken?

Thank You.

Financial Accounts of the US

With that pertinent question out of the way let's take another dive into the details of the Fed's Z1 report on the Financial Accounts of the United States.

Seven Key Details

  1. ​The net worth of households and nonprofits rose to $113.8 trillion during the third quarter of 2019.
  2. Domestic nonfinancial debt outstanding was $53.9 trillion at the end of the third quarter of 2019, of which household debt was $16.0 trillion, nonfinancial business debt was $16.0 trillion, and total government debt was $21.9 trillion.
  3. Domestic nonfinancial debt expanded 6.3 percent at an annual rate in the third quarter of 2019, up from an annual rate of 3.1 percent in the previous quarter.
  4. Household debt increased 3.3 percent at an annual rate in the third quarter of 2019. Consumer credit grew at an annual rate of 5.1 percent, while mortgage debt (excluding charge-offs) grew at an annual rate of 2.7 percent.
  5. Nonfinancial business debt rose at an annual rate of 5.7 percent in the third quarter of 2019, up from a 4.4 percent annual rate in the previous quarter.
  6. Federal government debt increased 10.4 percent at an annual rate in the third quarter of 2019, up from a 2.1 percent annual rate in the previous quarter.
  7. State and local government debt expanded at an annual rate of 0.5 percent in the third quarter of 2019, after contracting at an annual rate of 2.5 percent in the previous quarter.

​I picked up that lead chart idea from Sven Henrich.

Here are a few Tweets to consider.

Fed Balance Sheet

Credit Card Defaults

Corporate Profits

Bond Buying

Everything is Fine

Where?

Everywhere.

The Fed clearly has everything under control.

Please consider Fed Brainwashing on Net Wealth in One Picture.

Mike "Mish" Shedlock

Comments (53)
No. 1-25
JanNL
JanNL

Lead chart should be ratio chart. As shown somewhat useless apart from showing growth of both items.

Harry-Ireland
Harry-Ireland

I like Sven Henrich. He's on it, every single day. And Jeffrey Gundlach was talking about corporate debt as well, in his CNBC interview this week. And Michael Burry too. Luckily, CB's around the world are handling the situation with a firm hand and responsible policies. Nothing to see here, folks!

Roger_Ramjet
Roger_Ramjet

It's not only the rise in corporate debt, but that problem is being compounded by the decline in corporate equity, courtesy of stock buybacks, highlighting the extent that corporate balance sheets are being hollowed out (which primarily benefits the insiders and directors).

Shareholders are paying a higher and higher price for a shrinking slice of shareholder equity.

Greenmountain
Greenmountain

And likely to be a very good day for growing bubbles.

ZZR600
ZZR600

Surely a better comparison is the cost of this debt to corporations, rather than the level of outstanding debt? With record low interest rates, long dates or perpetual bonds at 0% are hardly a problem for a company, unless they rely on having to always issue new debt to fund operations?

Harry-Ireland
Harry-Ireland

All this is caused by central bankers. The damage they've done and continue to do is not even fully visible, but it's beyond repair. Just look at the past decade of zero growth in the EU, whilst government debt and private debt -due to assetbubbles- has risen dramatically. A decade of wealthtransfer from savers to speculators and still, they double down and implement more of the same. The Overton window needs to be on the destruction these fucking bankers are allowed to create. Time to educate the sheeple who've been lulled to sleep and distracted with tech-bullshit and vapid consumerism.

Tony Bennett
Tony Bennett

"Uh.. Pardon me for asking, but could you please explain the "appropriate steps" that you have taken?

Thank You."

...

Spot On.

Doing ANY sort of "appropriate steps" = Taking Away The Punch Bowl

Therefore, ZERO will be done - lest you be blamed for causing the bubble to burst. Banksters will do what they ALWAYS do - look the other way until the inevitable crisis - then step in and try to clean up the mess.

Tony Bennett
Tony Bennett

"The last time corporate profits stagnated while corporate debt accelerated higher was during 2000 just before the recession in 2001."

...

A mention needs to made on quality of corporate debt. The reach for yield by investors has led to surge in covenant - lite leveraged loans among other dreck. Has kept the expansion truck on the road well past historical expiration ... but will make the inevitable crisis deeper / longer.

thimk
thimk

Asset stripping on a grand scale . We are witnessing the liquidation of USA corps. And you thought American ran on Dunkin' !

RonJ
RonJ

"Does anyone spot a problem?"

Looks like a typical parabolic chart. The far left side of the chart looks little better than a flat line. The tread mill then starts running faster and faster, eventually ramping up to maximum vertical velocity. Then the chart breaks down.

RonJ
RonJ

In the 1930's Glass-Steagall was instituted so that "this can't happen again."

In 1999, it was dismantled. The reason it was dismantled was so that "this could happen again." And it has. Cycles repeat. Regulation is followed by deregulation is followed by re-regulation. A bubble in one financial instrument is followed by a bubble in a different financial instrument. Wash, rinse, repeat.

Human nature prevents stopping the runaway train. The politicians all want to get re-elected. If they do what is right, they lose their job. It is a self fulfilling perpetual motion machine, until the meter hits TILT and the wheels fall off.

bradw2k
bradw2k

Looks like conversion of capital to income.

"It should be clear why we are nearing the end of an epoch. Prices have been rising for a long time, and could keep rising for an even longer time. But conversion of capital to income, to spend, is like eating the seed corn. That cannot last forever. Sooner or later, you run out. And then real misery begins.

It should be clear that Keynes was right. We think he was a genius (though evil), and one of the smartest guys in the room. He did not mean rising prices will 'overturn society.' He meant the falling interest rate, which he said would commit 'euthanasia of the rentier'—kill the saver. That is happening now. With each rise in asset prices, the yield drops.

And the primary reason why 'not one man in a million is able to diagnose' it is that everyone loves a bull market. They’re too busy getting others’ capital as their income."

abend237-04
abend237-04

The SEC can easily kill the debt beast with one FASB bulletin. I'll even write it for them: Effective immediately, Rule 10b-18, issued in 1982 which authorized the repurchase of corporate stock is repealed.

If going cold turkey, as above, is deemed too hard to sell to the C suite gang, I'd propose the following compromise bulletin which will also pull the plug on issuing debt to buy stock to jack C suite comp plans:

Effective immediately, a fifth rule is added to the four existing rules governing stock buybacks: All future management and board member compensation resulting merely from a change in shares outstanding is hereby disallowed.

Bam_Man
Bam_Man

With corporate balance sheets so highly leveraged, the next recession will absolutely devastate the stock market and leave many, many well-known firms in bankruptcy.

How the Fed and Federal Government respond to this inevitable crisis will have huge ramifications.

AWC
AWC

Getting to be time for the treasury to be issuing some trillion dollar coins,,,,’er, hell, maybe a quadrillion dollar coin,,,,,whatever a quadrillion is?

RonJ
RonJ

FED Balance Sheet chart. Looks like it is working a "buy the breakout" moment in January.

ksdude69
ksdude69

What a bunch of jackasses! I love the record credit card defaults and record sign up attempts going on at the same time. This system is finished. Problem is how long can they drag it out and what will be left of us peons in the end?

CautiousObserver
CautiousObserver

The evil thing about this is the damage is done years before anyone can unequivocally prove it is bad policy. Mish's chart lays bare what is happening: New credit creation is tremendously outstripping productive returns. This ends when corporate profits shrink for a long enough period that everyone understands massive defaults are unavoidable. Judging from the 2000 and 2008 cycles, the gestation period for large defaults takes about 4 years after profits begin to shrink. It appears for this cycle that corporate profits began shrinking around 2015.

Can the Fed reverse this trend and increase profits by handing ever larger bails of money (in the form of credit) to federal government, banks and hedge funds? They are apparently going to try. Hint to Fed: if you create more credit in this situation you may indeed extend this asset bubble somewhat, but that new credit is not going to be used productively, and mostly you will line the pockets of a select few while digging a deeper financial hole for everyone else. The Fed is enabling something analogous to a Ponzi scheme.

Tony Bennett
Tony Bennett

"Everything is Fine"

...

ALL eleven sectors?

The latest from factset:

Earnings Growth: For Q4 2019, the estimated earnings decline for the S&P 500 is -1.5%. If -1.5% is the actual decline for the quarter, it will mark the first time the index has reported four straight quarters of year-over-year earnings declines since Q3 2015 through Q2 2016.

Earnings Revisions: On September 30, the estimated earnings growth rate for Q4 2019 was 2.4%. All eleven sectors have lower growth rates today (compared to September 30) due to downward revisions to EPS estimates.

abend237-04
abend237-04

Four natural market forces will eventually correct this cycle of Fed-induced debt excesses: 1.Write offs/write downs, like the $10B hit Chevron took earlier this week. Four majors have now written down assets since the Saudis dumped prices in 2014. As these firms are non-zombies, they will continue in business, but the $400+ billion excess debt, capex, etc. into the oil patch since 2008 will continue to come back out.

2.Mergers at fire sale prices. Those with useful assets, become zombies easily borrowing while waiting for Godot, will be bought out at greatly discounted prices, essentially extinguishing the related debt

3.Zombies in bankruptcy. There will be a much higher ratio of chapter 7 filings liquidation) to chapter 11 filings (reorg) this cycle due simply to the fact that the Fed's zirp infinitum has enabled it.

4.Rising interest rates. When the recession starts, bank loan committees all get loan quality religion in the same moment, as always. Companies like Tesla become instant roadkill.

Few consider that, when the Fed follows the market in raising rates (as it always does) a mere three percent increase in the long bond rate is equivalent, in capital loss to the bondholder, of the average junk bond default haircut, about 30%, since WWll. Eventually...

crazyworld
crazyworld

AT LEAST OVER HERE IN EUROPE WE HAVE BEEN WARNED;

Where to put your savings? When a bank go bankrupt almost every country here promesses, a 100.000 Euros to be paid back. There should be an insurance funding sufficient for that. However if say fives bank in the same country go bankrupt together, the same depositor will only receive 100.000 euros back from the fund although he deposited 500.000 Euros in 5 different banks. If he deposited 500.000 euros in five different banks in different countries so far the last decision will be of the resort of the European politicians. If he has a stock account in these banks, no one bank guaranty that the stock value will be paid back. If he has a vault in those banks, no one guaranty that the vault content will not be part of the total deposit calculation. We know all that because around 2010 CYPRUS banks failed and the European politicians discussed the conditions of banks deposit refunds.

The question is how much of our savings are we accepting to loose one day when the worse happen? If it is zero per cent, then only precious metals qualify.(not stored in the bank vault)

SHOfan
SHOfan

"With the record-long expansion in its 11th year, Fed policy makers have indicated in recent months that they’re watching the corporate debt situation closely."

At some point it will blow up, in their face. Serves 'em right.

Casual_Observer
Casual_Observer

More monetization ahead.

OkieNomics
OkieNomics

Mish wrote: "Domestic nonfinancial debt outstanding was $53.9 trillion at the end of the third quarter of 2019..."

Then he linked to his prior article which has a chart reflecting less than $25T of domestic liabilities. ("Fed Brainwashing on Net Wealth in One Picture").

What's the difference?

CautiousObserver
CautiousObserver

@JanNL

I charted the series on a log scale and added a line showing the ratio. Excluding volatility from recessions, the average ratio of corporate debt to profit does look like a pretty steady multiple since the early 90s. The multiple appears to increase around recessions, mostly due to falling profits rather than increasing corporate debt.