Corporate debt as an economic indicator is highlighted by charts provided by Real Investment research, and author Jesse Colombo. The charts are important, because there is a recurring pattern. I have isolated three of the charts that point out late cycle danger lurking for stocks and corporate bonds. This is not an analysis of treasury bonds, which will likely behave differently in a downturn.
We can see that danger lurks as corporate America’s debt load soars. However, Year Over Year percentage change has shown that this debt does not always bring on a recession, as we see in the early 1980’s in chart 1. Also, debt is high now, but it has been higher with regard to percentage change, seen in chart 1 as well.
The vulnerability has more to do with interest rates impacting this debt. Chart one shows danger, but chart two indicates even greater danger.
Chart 1:
Chart 2:
Chart 2 shows that as a percentage of GDP, corporate debt has a perfect track record of predicting recessions since the early 1980’s.
Jesse Colombo warns that the buyback mania is being financed with borrowed money, which is sure to push the corporate debt as a percentage of GDP through the stratosphere helped by the Trump tax cuts. Immediate gratification of shareholders could hurt future corporate investment.
Chart 3 shows that buybacks are not boosting earnings per share even though the quantity of stocks have diminished. And Mr. Colombo points out that this could hurt liquidity in the markets when selling does commence.
Chart 3:
A final warning from Jesse Colombo is that at some point in time, trouble will arise:
So, how will the U.S. corporate debt mania play out? Unfortunately, I do not see any way that it can end well. Serious pain is inevitable. I am completely aware that most mainstream economists and financial journalists will try to downplay these warnings by saying things like “it’s different this time” (those famous last words), “interest rates are very low, so it’s not as bad as it seems,” or “corporations are wise to take advantage of low rates to invest in their stock.” As for me, I take the Occam’s razor approach: if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. There is no doubt in my mind that we are in a central bank-driven bubble. At the same time, I’m not necessarily “calling the top” just yet and I would not be surprised to see U.S. corporate leverage increase even more before the inevitable day of reckoning.
