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The US/Global Finance System: smoke and mirrors?

Really like this video by Vonetta Logan at Tasty Trade on the US corporate debt (with implications world wide). It makes some interesting points about what could really be funding the recent growth the US stock market. Many US companies are borrowing heavily and are using that money to fuel a rise in their stock price. Therefore the rise in that market is not coming from improvements in the companies’ performance anything like as much as it was in the past.

What happens when the music stops – and interest rates rise? Some companies will be in deep trouble.

Some companies will be okay. The more genuinely innovative ones are offering products and services which are valued by their customers and that should help cushion them. Some of the companies borrowing heavily have huge cash reserves. They keep that cash outside the US so that they can defer taxes on it. They then borrow and use that debt to fund their activities. Presumably, when this all comes to an end (and interest rates rise) the cash rich companies will have to start bringing that cash home, pay taxes on it, and get on with running their business. They won’t like it, but they will survive.

However, some companies will struggle to pay the higher interests rates and to pay off their debts. They will no longer have the cash to prop up their share price. Even the cash rich ones (who are at least partly cash rich due deferred taxes) have been using cheap debt to prop up their share prices.  What will happen to share prices when interest rates rise? Probably not something good.

It is interesting that the availability of cheap debt has made it easier these companies to avoid paying huge amounts of tax. They don’t have to bring the money home to use to run their business (which they normally would do after they have paid the tax on it) as they can get cheap debt instead and use that to run their operation. Unfortunately, with many of them the debt does not go into research and development, or the types of things which would improve their business. A large percentage of it goes into paying Dividends and buying back their own shares to make the company look better.

In essence what Vonetta’s report implies is that many large US companies are using the availability of cheap debt to defer taxes and make themselves look much better than they really are by propping up (and pushing up) their share price.

Of course, this will not just be going on in the US markets. Companies globally will likely be following similar patterns of behavior.

I would have liked more details on some aspects (such as what percentage of the cash kept abroad would have to go in taxes if repatriated). However, as the video is intended for general consumption  she could not go too far into details.  I really enjoy Vonetta Logan’s lively and topical style and how she manages to makes a topic like Corporate Debt entertaining.

I am not one for taking a doom and gloom stance about the future, but I do think it is wise to be realistic about what is actually in play in our current economic system. Times of change are often preceded by extreme behaviour and the finance markets are the likely place where some if the needed changes in our global society will have to play out. The imbalances and manipulations, once hidden and obscure, are likely to come more and more to the forefront till we can see them for what they are. Then we have a chance to create a society, and a global financial system, which serves all of us rather than the manipulative few.

 

 

 

 

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