Thursday, May 8, 2014

Zero Hedge: Two Points


From Here's A Chart You Won't See On CNBC at Zero Hedge:
Today, we are happy that more are starting to notice this simple math problem. Here is Deutsche Bank's Torsten Slok who is the latest to be struck by this "revelation".

If you look at cash levels relative to debt levels you find that corporate cash holdings are at the lowest level in 15 years...

Good point. Cash -- or let's say money -- relative to debt, is an important measure. Hmmm... Where have I seen it before?

Today, I am happy that ZH is starting to notice.

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Zero Hedge makes a good follow-up point:

Of course, as long as rates are low and keep declining, this record debt hoard is not a big issue.

Once rates start going up, however, nobody would possibly have been able to foresee the absolute massacre that will take place at corporations, levered with publicly tradable debt to never before seen levels.

You hear that all the time, about government debt. "If rates go up, there'll be a problem". But it is just as true outside of government as in, as ZH notes.

3 comments:

Jazzbumpa said...

Once rates start going up, however, nobody would possibly have been able to foresee the absolute massacre that will take place at corporations, levered with publicly tradable debt to never before seen levels.

The interest rate on tradable debt is irrelevant. Corporations will pay at the coupon rate, and the market value of the bond will change.

The interest on new debt will change, so new borrowing will be taken on at new sets of criteria for the borrowers.

People running corporations are, in general, not stupid. They will react to changing condition, and the existing cash hordes will give them a comfortable cushion.

Plus, if rates go up, it will indicate that business conditions are improving.

I really don't see the problem here. From July 2012 to Nov 2013, rates went up by 1.4% and there was no bloodbath. Rates have gone down again the last 6 mos.

http://research.stlouisfed.org/fred2/graph/?g=A7D

Cheers!
JzB

The Arthurian said...

" Corporations will pay at the coupon rate, and the market value of the bond will change."

Okay, so it's not the corporation but the rentier who suffers. (There may be some overlay there).

My thinking is that when interest rates go up for "tradable debt", interest rates are going up for all kinds of debt. Everybody's "debt overhang" is affected.

The Arthurian said...

overLAP not "overlay"