The Wall Street Journal, which didn’t exactly cover itself in glory with its reluctant and initially Pollyanna-ish coverage of the 2007-8 LBO and debt market meltdowns, is now sounding the alarm – on its front page no less:
Sure, the piece is essentially just LCD’s data through the WSJ’s megaphone, but it’s a step in the right direction, and, really, they had to get the worry beads out in the wake of Toys R Us.
Wolf Richter crunches his own numbers in a more insightful piece from yesterday (Corporate Mirage: Debt out the Wazoo, Sales Languish, Stocks Soar) that illustrates the absurdity of the current debt/sales/share price trend lines, and is well worth reading.
In short, debt jumped 35% since the prior peak before the Financial Crisis, as sales rose only 12% over the same period, but stocks have doubled from the highly inflated levels at that time.
It’s all part of the phenomenon of repressed yields and cheap credit: Companies are borrowing large amounts of money to buy back their own shares and to buy out each other, instead of funding investments in productive activities. The hype around these share repurchases and M&A fires up stock prices and contributes to the current stock price bubble, but does nothing for the economy and leaves corporate America and share prices in a very precarious position.
So is Toys R Us the Tribune of the new unwinding? As Richter writes, “Hype works, until it doesn’t.”