Ticking Time Bomb
I’m of the long standing view that Fed chairs have one prime responsibility above all others: Keeping confidence up, and if it requires to sweet talk problems then that’s what it takes. The often classic quote by Ben Bernanke of “subprime is contained” right before it blew up in everybody’s face being a prime example. Is the Fed that blind to reality or just on an elaborate marketing mission to ensure that nobody panics and sells stocks? I leave that judgment to the reader.
But I can see differing messaging coming out the Fed when [certain] people are in office and when not.
Take corporate debt for example.
Here’s Jay Powell in May of this year sweeting talking and dismissing any concerns:
“Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate. Moreover, banks and other financial institutions have sizable loss-absorbing buffers,” he said. “The growth in business debt does not rely on short-term funding, and overall funding risk in the financial system is moderate.”
Sweet, no worries then. Odd then that Janet Yellen, no longer in office, feels free to say in essence the exact opposite:
“I have expressed concerns about leveraged lending,” Yellen said during a keynote discussion that was closed to the press. “I do think non-financial corporations have run up, really, quite a lot of debt.”
“What I would worry about is if the economy encounters a downturn, we could see a good deal of corporate distress. If corporations are in distress, they fire workers and cut back on investment spending. And I think that’s something that could make the next recession a deeper recession,” “I have concerns about the deterioration in lending standards that we have seen,” Yellen said. “A large share of it is covenant-lite and some of the explicit ways in which covenants have weakened are a concern to me.”
No worries from Powell, worries from Yellen.
Well, for one corporate debt has increased by 64% in the last 9 years now reaching $10 trillion:
Good thing profits have vastly increased in that time:
Oh wait, corporate profits have actually peaked in 2014. Well that’s odd, as markets keep racing higher from high to high you’d think there’d be this massive expansion in profits. Well of course not, profit growth peaked last year on the heels of the corporate tax cuts resulting in corporate tax payments collapsing to levels only seen during big recessions:
Ponder this: Corporations now pay roughly the same about of taxes as they did in the mid 90’s when the economy and aggregate profits were much smaller.
Quite the historic deal.
Stay tuned to …
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