1901 Cartoon: “Wall Street bubbles – Always the same“
American financier J. P. Morgan is depicted as a bull, blowing soap bubbles for eager investors
Note to Bethany Mclean’s Readers: There is a newer version of this piece.
Summary:
The corona virus may turn out to be the “straw” that broke the camel’s back. Whether or not this “straw” turns out to be large, it is important to focus on the rotten fundamentals it exposed.
When we look back on this era’s economy, we will remember a time of “Anemic Growth” when stock prices were propped up by Financial Engineering — a BuyBack Bubble that was funded by Corporate Tax Cuts and Debt that masked their true performance.
Eric Basmajian writes on Seeking Alpha:
From 2014 through the start of 2018, corporate profits declined. The one-time spike in profits after 2018 was due to the corporate tax cut. Essentially, without the corporate tax cut, the corporate sector has seen virtually no profit growth since 2014.
Financial engineering has allowed publicly-traded companies to report strong earnings growth.
Corporations were able to pump up their stock price by borrowing money in the bond market and using it to purchase their own stock. It used to be that there were dozens of AAA-rated companies; today there are only two. Corporate debt now stands at $10 Trillion, half of which is rated BBB, just above “junk” status. This corporate debt will make the recovery much more difficult.
Inspiration:
I was inspired to write this post by a 9 minutes story on NPR’s Planet Money about Corporate Debt:
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