Today’s (i.e., Friday, 9/6/13’s) Wall Street Journal featured a page 1 article entitled “For Corporations and Investors, Debt Makes a Comeback,” which outlined the dangers of growing debt levels that short term and short memories pundits are lauding as the salvation of our economy from the near death experience that it experienced as a consequence of taking on too much debt.
Long time readers know that yours truly shares the sentiments it expressed and could have written the article, had I had the time to do the extensive research its authors conducted, and thus to comment on it seems to be beating on a dead horse. However, this debt problem seems to be only a comatose horse that refuses to die, or perhaps, in the fashion of the day, and equine zombie that occupies our fascination until it fulfills our nightmares. So here goes.
Too much debt sunk our economy. A return to the attitude toward money and borrowing that led to too much debt, even as we bob to an uncertain position just barely at the surface, will surely sink our economy again. Yet those who purport to know something about how things work, and who only recently acquired such skills as shaving, seem to think that debt is the bromide that will somehow save us. This endless prescription of the financial equivalent of the hair of the dog is perplexing and troubling to us older guys who have been around the track a few times and thus have a measure of perspective.
Regarding this particular article, it is not as troubling as it appears at first glance; it concentrates mostly on corporate accumulation of debt. While corporate debt surely had a big role in sinking our economy in 2008-09, personal debt played a far larger role. That having been written, the ravenous appetite for corporate debt is itself troubling, especially because it is being put on the books as corporate profit growth decelerates to the low single digits. Yet investors pile into corporate debt, and especially into high yield, or junk, debt, in a desperate search for yield born of Ben Bernanke’s insidious and never ending War on the Elderly.
This rushing into the riskiest corners of the debt market in a reach for yield would be troubling enough if people were using hard accumulated savings to do so. But apparently they aren’t. Instead, they are borrowing to do so; margin debt reached a record $384 billion this Spring, up nearly a third from the last year. The record this year’s margin borrowing transcended was set in 2008; oh, boy.
The article’s authors, James Sterngold and Matt Wirtz, who surely deserve fulsome kudos on such a well written and researched piece, took the trouble to interview one Mr. Gerald Schatz of Fort Washington , PA.
“This just made so much sense to me. Leverage is just using cheap money. I don’t consider this a big risk.”
And then
“I never did anything like that before. I wouldn’t have bought a lottery ticket. But this is different.”
It is not at all heartening to know that the likes of Mr. Schatz would not buy a lottery ticket. A lottery ticket is indeed a poor investment, but it’s only A BUCK ! Instead, he risks half a million dollars arbitraging interest rates. Shrewd. Wait until rates start to rise. One wonders if Mr. Schatz’s broker, who lent him the half million, somehow forgot to mention the impact of rising rates on the value of the bond portfolio that Mr. Schatz bought with borrowed money.
Perhaps this is indeed, as Mr. Schatz says, “different.” But surely, at 78, and having accumulated a sizable portfolio, Mr. Schatz has been around long enough to experience that cold feeling of terror that runs down one’s spine at the words “This time it’s different.”
Last night, my wife and I watched Vertigo, the Alfred Hitchcock classic starring Jimmy Stewart and Kim Novak that some experts consider one of the best movies ever made, for about the 10th time. We very much enjoyed watching it again. Watching this even darker debt movie again will not be nearly as enjoyable.
