Strange that nobody linked to a chart. Here's one I found. Household Debt to GDP is lower than in 2008 but is still very high historically.

https://tradingeconomics.com/united-...ds-debt-to-gdp

But it's not that surprising that debt is above historical norms, given the once-in-a-lifetime low borrowing rates of the past several years.

Household debt is high and US Government debt is at its highest level since the end of World War 2. What about corporate debt though? I went to the St. Louis Fed's website to find a corporate debt to GDP graph and couldn't locate it. Apparently it's there though because this Forbes article references it:





ITT, it was mentioned that 45% of S&P sales are from international. I also see that 60% of S&P 500 Tech companies come from international (Source). Does this make corporate debt to US GDP figures less relevant? Also, does this make Warren Buffett's favorite market indicator, Total Market to US GDP less relevant? According to the Willshire 5000 valuations are through the roof right now, although a graph in this article shows that the Buffett Indicator is lower than it was in 2000, but still very high historically. Perhaps this is all not so relevant today though?

people like to point out absolute levels being high (both corporate and consumer).

Its servicing levels that matters. If a 30 year mortgage is locked in at low rates in the monthly payment as a % of income that matters more than the absolute amount.

https://www.bankofcanada.ca/2018/05/...g-the-problem/

debt to gdp

https://tradingeconomics.com/united-...ds-debt-to-gdp

canada: worse because they have more housing debt

https://tradingeconomics.com/canada/...ds-debt-to-gdp

and delinquencies on mortgages and credit cards are at the lowest levels since theyve been recording it...suggesting the debt is quite serviceable

https://fred.stlouisfed.org/series/DRSFRMACBS

https://fred.stlouisfed.org/series/DRCCLACBS


as for relevance of market to us economy yes there is less relevance you have to dissect for each stat you are looking at. basically all charts the challenge is determining how relevant is this, and total debt levels are not really relevant because that is offset by increased incomes and the other side off the blanace sheet: assets (wealth).

I really don’t understand the fascination with debt levels. Over leverage and over valued underlying assets are what cause crashes not debt. Debt is irrelevant. It’s somewhat correlated to leverage that’s why it acts as an indicator to some extent but not always a factor if a company has high liquidity and just taking debt for structural reasons or doing it because it’s incredibly cheap as it’s been in the past few years.

Companies are getting more levered but not even close to 2008 levels. Consumer debt is not the underlying asset that’s going to cause a crash it’s almost certainly going to be sovereign debt and their derivatives .

even corporate debt is misleading to many that read the absolute numbers or the BBB ratings. They have tons of cash and are doing record buybacks.

what has happened is thier cost of debt is cheap, so in order to achieve optimal textbook capital structure (this is easy to calculate, they all do it) and maximize return for shareholders they have to hold higher levels of debt than if the debt was expensive. they are not acting irresponsibly...they are doing what is optimal.

The irrational actors may be all the people clammering to buy baskets of thier debt...trying to get safe yield. they do this because there is no yield in government debt so they chase yield in corporate debt, buying Collateralized loan obligations (CLOs). This drives down cost of debt and companies continue acting rationally and maintaining high debt levels to achieve textbook capital structure.

its the buyers of the debt that may have lost their mind...not corporates

Do you have a chart showing how levered companies are over time?

Buybacks do not create real value for the shareholders (i'm sure you will take the opposite position, although I'm not sure why), unless they are used to buy back stock that is underpriced. If they buy back stock that is overpriced they actually cost the shareholders value. So why are companies not using the cash to produce real value in the form of new projects or acquisitions?

BTW, are all companies flush with cash or just a few of the mega corporations? Are there charts showing this cash level over time?

What happens when interest rates go up?

https://www.yardeni.com/pub/spxratios.pdf

Most significant for illustrating leverage is debt to equity or debt to assets but there are a lot of factors that create leverage and liquidity issues.

they scale back buybacks and pay down debt until they reach optimal capital structure in light of the new higher rate. so the answer to high debt is to gradually increase rates, let companies optimize and probably do something about CLOS

companies will probably also reduce capex a bit and increase profits.

as for buybacks...you are confused on the purpose..they arent meant to increase the value of the company, they are meant to distribute cash to shareholders, and are exactly the same effect as a dividend. Companies go with buybacks if its a one time thing, and they go with dividends if they plan on doing it every quarter.

what you are suggesting - buy low sell high - is the job of investors. The companies job is simply to distribute cash to investors and let them decide their entry and exit points...that way the investors that think its too high can cash out high and the ones that think its too low can hold. the company doesnt make that call on behalf of everyone nor should they

Thanks for this! What this indicates to me is that corporate debt levels are at very normal levels (relative to the past) and should be of little to no concern.

I didn't realize the purpose was to distribute cash to investors. Why not just do one time dividends instead? The issue I have with buying back stocks at high price points is that they are rewarding short term investors and punishing long term investors.

I also heard one of the main reasons companies do buybacks is because buying back stock tends to increase executive compensation. That is very troublesome.

people expect a dividend to be forever. it a company stops paying it out then investors get all fussy because they thought they bought a divvy company. So many non divvy paying companies want to stay that way...and just give extra cash out via buybacks when they have no great ideas what to do with it

I figured that might be part of the reason. Thanks for your insight.

dividends are better than stock buy backs... generally speaking investors are better at finding a better way to reinvest that money than executives. Executives are bad at trying to determine when to buy back shares and are also notoriously bad at realizing when their own companies are over-valued, also there are conflicts of interest there with executive compensation. Dividends are more shareholder friendly.

Dividends are often taxed as ordinary income which is a much higher rate then long term cap gains so buybacks typically save investors on taxes vs dividends.

When does the market start reacting to the favored 2020 president?

How differently would the market respond if Bernie became an 85% favorite to win tomorrow compared to a week before the election?

1. A few months before. The uncertainty will weigh a little already and if a bad choice is winning it will drag.

2. Not caring vs ****ting themselves.

If a not-market-friendly candidate is doing well closer to the election, sell calls.

Risk aversion is a very natural instinct, so I don't mean to pick on this post in particular, but it's a perfect illustration of how costly it is to try and time the market. Three months later, equities are up 15%, while rates have ground lower, and there are no more rate hikes in sight. This was the kind of move you can't afford to miss. These moves make the difference between the long-term investors who get rich, and the retail market-timers who go with their guts and lag the market.

People give all sorts of fundamental and technical reasons to stay away from equities, but in the end it boils down to their own aversion to risk. Successful investors understand that risk is what the market compensates them for, and the riskier that people think equities are, the better the compensation for holding them. Comparing market sentiment between now and three months ago really demonstrates that.

Agreed. My only regret is not piling in more than I did. Im still sitting on 15% cash. Contemplating just shoving it all in right now.....

good discussion...

high levels of consumer debt is concerning but it wasn't really high consumer debt that caused the credit crisis. it was more like incredibly lax standards by many parties. that's a big simplification but too many bad mortgages were written. and assumption was that housing prices would never go down (maybe never grow near to zero even).

2001 to 2003 bear market is good analogy for what might happen here. i don't see the vicious cycle we had in 2008 where bad news, falling prices, negative disclosures etc. seemed to feed on each other for months on end..

as per stock market leading economy, that's a general idea and 1995 through 2000 was the stock market bubble of all-time. seems like the aftermath would be a bit different than normal bear markets. and i think the tech sector did shrink in the real economy. i'd have to check that.

it is never obvious time to buy in huge bear market. i think the best you had in recent years were when the US government/fed and the EU basically back-stopped everything. and the USA market didn't bottom there. it got worse in 2009 although VIX/Ted spread were under control so there was no panic.

for people who weren't around, i don't remember one well-known investment figure yelling BUY in late 2008... maybe they don't want to get sued later. also, if the USA government let it go, things would have got very very bad and that was something that could reasonably have happened (i don't think it was likely though)

lastly, all analysis i think has to keep in mind japan. not certain but i think it's still way below its late 1980's peak in nominal figures.

there's no reason in today's world that you can't shove it all in today and take it all out in 3 months or something similar... note like the old days when commissions would kill you

And so how do you determine what that point is? Unless you're using some vague, unquantifiable measure of the publics emotional attitude towards the market there's no clearer signal of people thinking the zombie apocalypse is coming than changes in price.

In that respect,when the market drops 10% from it's 30 day high, would your prediction be that the following 30 days will show a greater than 8% annualized return? You can back test that pretty easily and I would guess that there wouldn't be a significant relationship. If you've done the work feel free to prove me wrong though.


Why would the not-market-friendly candidates likelihood of success not be priced in a few months before? It's pretty widely studied. I'd expect even leading up to the primaries you'd get a very minor downward pressure from something like Bernie pulling ahead in the polls.

You can sit there with your finger on the buy button while refreshing the political pollster sites to be the first to act on the news but Id have to imagine after even one day has passed it's virtually as likely that people will have overvalued the info as it is that they've undervalued it.

Yeah, but then you have the same problem, just on the other end....

I've never been more convinced of buy and hold and I was already convinced! Yet, there I was, trying some lame combination of "Dollar-Cost Averaging" and market timing.

The times I did lump sum, and held, are the times I felt the best about my decisions after the fact.

A good time to bump this thread.