The roots of the next recession could lie in U.S. corporates’ debt-to-cash ratios, a top U.S. economist warned Wednesday.
The cash-to-debt ratio of speculative-grade borrowers reached a record low of 12 percent in 2017, below the 14 percent level in 2008 — meaning that for every dollar they have in cash, they have $8 of debt.
Corporations are borrowing against their net worth, as opposed to borrowing against cash flow and income, which is effectively what households were doing in 2004, 2005 and 2006.
Corporate debt in the U.S. is now higher than it’s ever been.
This is typically manageable if companies have a lot of cash to service that debt. But a looming problem, many economists are warning, is that — excluding the country’s biggest companies — debt-to-cash ratio is now higher than it was in 2008 during the financial crisis.
Ten years on from the crash of Lehman Brothers that heralded the Great Recession, market watchers are looking for clues as to where the root of the next crisis might lie. Steve Blitz, chief U.S. economist at TS Lombard, sees a giant red flag in corporations’ debt versus their means to pay that debt off.
Buy a House, Get a Free BMW! China Developers Are Getting Desperate
Chinese property developers are offering free luxury cars and hefty discounts to lure buyers as lending curbs and funding constraints squeeze their finances.
China Merchants Shekou Industrial Zone Holdings Co. is giving away a BMW Series 3 or X1 to buyers of a three-bedroom unit or townhouse at its Shanghai development. The car, or cash equivalent, equates to about a 10 percent discount on the 3.1 million yuan ($450,000) price of the 89-square-meter apartment.
At China Evergrande Group’s 646 nationwide projects, a basic 11 percent price cut widens to as much as 26 percent once extra perks, such as discounts to buyers referred by Evergrande employees or previous buyers, are thrown in.
A further incentive: An initial down-payment of just 5 percent is required, compared with the usual 30 percent deposit required by local governments. Developers are bridging the gap by offering multiyear installment plans as a way of getting around higher thresholds aimed at deterring property speculators.
DON’T LET LOW #MORTGAGE DELINQUENCY RATES TRICK YOU..
During #housingbubble 1, delinquencies spiked as prices declined. This recovered just as housing bubble 2 became inflated.
The bottom line is that delinquencies were low during the 1st bubble too
— OW (@OccupyWisdom) September 16, 2018
— M/I_Investments (@MI_Investments) September 18, 2018