Monday 11 March 2019 5:35 pm

Forget Brexit, corporate debt is a bigger issue

As a few of you might have been told many times already, today is the latest Brexit D-Day for the UK, and for Theresa May in particular.

Now, despite the fact that I am – at the moment that you are reading this – down on a chilly College Green in Westminster reporting on the latest Brexit cliffhanger, I am actually someone who, in common with much of Britain, has become a bit bored of Brexit. I think most of us are.

Of course, the markets are wary of Britain slipping its moorings and drifting away from Europe to somewhere lost in the mid-Atlantic.

But moving aside from Brexit for a couple of hundred words, I just want to point out that there are one or two other incy-wincy issues that may also screw things up, especially for financial markets.

These range from President Donald Trump to China, from Russian President Vladimir Putin to Middle Eastern conflict. But what concerned me most in the last seven days were two separate reports that, when combined, make sober reading for those looking for northerly progress in stock market valuations.

First was the estimate from Howard Silverblatt of S&P Dow Jones Indices that US S&P 500 companies bought back around $800bn in stock last year, which is a new high for any calendar year.

Okay, many of you may not see this as a complete waste of capital in the way that I do. Others may think that there’s nothing wrong with pumping up the value of your stock, and hence your own stock-based renumeration.

You may say, why not? I mean, if the cash is just going to sit on the books earning nothing, then surely this is just efficient capital management?

Except in many cases – and this is where the second report comes in – it’s not exactly “cash”, but debt that is paying for the buybacks.

You see, many corporates, according to the Institute of International Finance, are loaded up to the gills in debt at unprecedented levels.


Now, the same non-financial corporates which are buying back their own stock also happen to have 50 per cent more debt than they had in 2008. Over $15 trillion worth of corporate debt, in fact.

Anyone out there adding up the inevitable consequences of exhibit A plus exhibit B?

This explains the absolute panic of the last quarter of 2018, when companies feared a prescriptive ongoing rate-hike scenario from the Federal Reserve.

It also explains how the market wobble was very little to do with jobs data or inflation.

It was about someone out there spotting that this giant debt-inspired buyback “Ponzi” would soon be exposed if rates got anywhere near historic norms.

That, my friends, is something you should really worry about, whether or not the Prime Minister brings home the Brexit bacon.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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