Suspicion isn’t Merely Asleep – It is in a Coma (or Dead)
There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest?
Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what they are looking at is indeed, a late parrot, as deceased and expired as it can possibly be. We hereby submit that Polly, the “Norwegian Blue”, serves as a perfect stand-in for the risk perceptions of today’s corporate (and EM) bond buyers.
Polly, we hereby rename thee “The Suspicion of Creditors”.
Now, if Polly has in fact breathed her last, then we would have to assume she will be miraculously resurrected one of these days. Maybe she will come back as a slavering zombie, which would actually be quite fitting. If Polly is in a coma, she is bound to suddenly wake up one day, and we mean “suddenly” (as explained further below). One thing is certain though: just like the Terminator, Polly will be back.
Diverging Signals in a Giant Credit Bubble
Although listed companies have amassed a lot of cash in the aggregate, Moody’s recently pointed out that the ratio of debt to cash has increased to levels that would normally indicate far higher expected corporate default rates and much wider credit spreads than are currently in evidence.
To this one must keep in mind that just a small handful of listed US companies actually hold the vast bulk of said cash. As of mid 2016, just five US tech companies held more than one third of all corporate cash (AAPL, GOOGL, MSFT, CSCO, ORCL) – a share that has grown even further over the past year as far as we can tell. Apple alone has reportedly more cash on its balance sheet than eight entire industrial sectors.
Note here that there is some disagreement over what should be counted as “cash”, but generally it is thought of as “cash an cash equivalents”, which include highly liquid short term investments such as US treasury bills and similar securities. In light of their liquidity and the existence of a well-developed repo market, one could well term these secondary media of exchange.
A long term chart by Moody’s depicting the non-financial corporate debt to internal funds ratio vs. actual and expected corporate default rates. Even ignoring the fact that the aggregate debt-to-internal funds ratio is actually a bit misleading in a sense, due to the concentration of cash holdings at just a few companies (most of which have very little debt to boot), the recent divergence in default expectations from the ratio is highly unusual. It is a good bet that this dichotomy will …read more
Source:: Acting Man
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