Courtesy of Michael Panzner, Financial Armageddon
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I consider myself a realist. However, I’m sure others would say I’m permabear, an alarmist, a man who only sees half-empty glasses, an individual who is either unwilling or unable to see the silver lining behind the clouds.
Who knows, maybe they’re right. But even so, that won’t stop me from calling things as I see them. Yes, there are some developments that look, superficially at least, like good news. But if you dig even a little bit deeper, it seems that more often than not nowadays there is less there than meets the eye.
The optimists have talked, for example, about the recovery in corporate profits, but they downplay the layoffs and cut-backs in investment that contributed to those gains. They note the recovery in the banking sector, but forget to mention all of the financial and political assistance those firms have received — and are still receiving. They highlight signs of stability in the housing market, but ignore lopsidedly bearish supply-and-demand fundamentals that are impossible to miss.
In sum, they are the ones relying on an entirely one-sided perspective — one that tells us little about the the true state of things.
With that in mind, I can’t help but highlight a recent post by The Market Ticker’s Karl Denninger, "Beware The Claims Of Cash-Hoarding," in which he strips bare yet another of those alleged pieces of "good news" that are supposed to keep the "recovery" alive.
At the end of the third quarter, cash held by 419 nonfinancial companies in the Standard & Poor’s 500 list was up 49% from three years ago—before the start of the recession—while total debt was up a more modest 14%, according to an analysis by The Wall Street Journal.
Sounds good, right?
Then explain this:
That’s equity value divided by (tangible assets less debt), all from The Fed Z1.
It doesn’t lie folks.
Cash is a tangible asset.
So what’s really going on here? We have the market crooners – again – ignoring deterioration in asset valuesacross Corporate America. We’re again trading on hype and claims that are true but materially misleading in that they omit the other parts of the equation. And while cash has gone up, the value of property, plant and equipment has plummeted much faster, leading the current leverage index to nearly triple since the recession began.
If corporations spend their cash they will drive this ratio even higher (more unfavorable), and so will further increases in stock prices.
As I have repeatedly pointed out, an unfavorable Corporate Leverage Index does not mean the market cannot go up. It is, however, a very clear measure of risk. It represents the number of dollars you must spend on a common stock in order to get one dollar of tangible liquidation asset – whether that asset be property, plant, equipment, or cash.
Normally recessions lead to material declines in this ratio as corporate leverage comes out of the system during a recession as a consequence of bankruptcies, reorganizations and stock price declines.
This time the exact opposite thing happened, and the change was not small.
This is what happens when you produce a claimed "economic recovery" on lies.
