Friday, February 21, 2014

Parabolic Corporate Debt

The following chart shows real nonfinancial corporate business credit market liabilities per capita (September 2013 dollars).

Click to enlarge.

An exponential trend channel did not fit the data well at all but a parabolic trend sure did.

Parabolic moves are not sustainable over the long-term. This is a mathematical certainty. About the only thing open for debate here is the timing of the failure(s).

There's a reason that so few of the companies in the S&P 500 still have AAA ratings. It is not something pointed out on CNBC though. No, sir. It's just piles and piles of corporate cash that's talked about. Why won't they spend their hoard? Blah, blah, blah, blah, blah.

1. Over the short-term, we're pretty much at the top of the channel again. This data ends in the 3rd quarter of 2013. Keep in mind that 5 months have elapsed since then. This is not even remotely the ideal investment environment that we saw in 1982 (where we were right at the bottom of the trend channel with plenty of room to grow).

2. Over the long-term, to put it bluntly, we are so @#$%ed.

March 21, 2012
Parabolic Moves Always Have Their Reasons

A parabolic advance will continue as long as there is an inflow of money to keep the move going. But, then at some point the inflow of funds begins to fade and when it does gravity sets in. It is at that point that price begins to soften. As price begins to soften the smarter money begins to exit and prices begin to soften more. In the end all parabolic advances end pretty much the same and the late-comers to the party are typically left holding the bag.

I can't say when the parabolic trend will fail (either in the short-term or the long-term) but I will say this. I became a permabear over debt concerns. I remain a permabear over debt concerns.

When the @#$% hits the fan again, and it certainly will if we continue to follow parabolic debt paths, then I'd much rather be owning "bubbly" inflation protected US treasuries backed by a monetary printing press than "bubbly" corporate debt backed by "private jets, office renovations, and custom-built commodes." Of course, that's just an opinion. Your opinion may vary.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart


Anonymous said...

If you normalize the data by dividing by real gdp , you get a linear trend downward. If you divide by real gdp per capita , the trend becomes upward linear.

I think the upward trend is probably the true picture and , like you , expect it to end , sooner or later.

Stagflationary Mark said...


I think the upward trend is probably the true picture and , like you , expect it to end , sooner or later.

Yeah. If we're right it won't just end, it will end ugly.

That said, sooner or later can take a long time. We are masters of can-kicking, just like Japan is/was.

I'm not an imminent doom permabear. I'm more of a stacking individual straws on a camel's back until the legs give out kind of permabear. Not sure how much more straw the camel can take. Just pretty sure that it can't go on forever.