There is a reason why US corporate balance sheets have rarely been in better shape: it is because the Fed has become the S&P500’s bad bank.
As the chart below shows, in the six years between 2006 and 2012, corporate net debt of the S&P500 has barely budged from $1.5 trillion, even as corporate profits have soared (albeit profit margins have now declined for two straight years as SG&A has already been cut to the bone, while the marginal benefit from such below the line items as net interest is about to turn negative if and when rates really turn higher – hint: they won’t, because Bernanke is all too aware of this particular nuance). What has offset this?
Why the bad bank formerly known as the Federal Reserve of course, which has huffed and puffed, and force-fed $2.5 trillion in new credit money (mostly reserves) down the market’s throat (created out of thin Treasurys), which has zero end-demand for such credit, as a result it has gone straight into the one place that will gladly accept it – the stock market. For now at least. At some point this fungible money will spill over and then all bets are off.
It gets better.
Ever had the feeling like the market is beyond broken, and all correlations between corporate profits and fundamental economic factors have been totally and utterly broken (sarcasm aside of course)? Of course you have. So has Morgan Stanley’s Adam Parker. To wit:
One of the main challenges to assessing corporate profitability is the breakdown in relationships between economic variables and corporate profitability metrics. In fact, the two seem incongruous in some cases. If companies don’t invest in capital spending and research and development, they may maintain higher margins, but this lack of spending will not be a good catalyst for economic growth.
Why do some of the economic and corporate relationships no longer hold? One possible explanation is that while company balance sheets are in great shape, the Fed’s balance sheet has massively expanded over the past few years.
See chart above… and read on:
There appeared to be a relationship between GDP and margins from 1970 through the early 2000s, but there has been a notable departure since. In fact, there has been such a bifurcation between the US economy and the profit margins of US companies that they appear to be anti-correlated now.
Ah, good old Bernanke: nothing like a central planner meddling so much in the economy and the stock market, the two are not only intuitively broken but also empirically. But hey: as long as the music which is good for the S&P, and now by definition bad for the economy, goes on, one must dance. If only those 0.1% who directly benefit from Bernanke’s socially bankrupt policies.