The FT has reported this morning that:
Debt at UK listed companies has soared to hit a record high of £390bn as companies have scrambled to maintain dividend payouts in response to shareholder demand despite weak profitability.
They added:
UK plc's net debt has surpassed pre-crisis levels to reach £390.7bn in the 2017-18 financial year, according to analysis from Link Asset Services, which assessed balance sheet data from 440 UK listed companies.
So what, you might ask? Does it matter that companies are making sense of low-interest rates to raise money when I am saying that government could and should be doing the same thing?
Actually, yes it does. And that's because of what the cash is being used for. Borrowing for investment makes sense. Borrowing to fund revenue investment (that is training, for example, which cannot go on the balance sheet but still adds value to the business) makes sense. But borrowing to pay a dividend when current profits and cash flow would not support it? No, that makes no sense at all.
Unless, of course, you are CEO on a large share price linked bonus package and your aim is to manipulate the market price of the company. It is that manipulation that is going on here, I suggest. These loans are being used to artificially inflate share prices.
The problem is systemic. In the US the problem is share buybacks, which I read recently have exceeded $5 trillion in the last decade, meaning that US companies are now by far the biggest buyers of their own shares. That is, once again, market manipulation.
And this manipulation does matter.
People think their savings and pensions are safe because of rising share prices. They do not realise it is all a con-trick.
And companies claim that their pension funds are better funded as a result of these share prices, and so they are meeting their obligations to their employees when that too is a con-trick. They may be insolvent when the truth is known, so serious is the fraud.
And sentiment is, wholly irrationally, but nonetheless definitely, based on the fact that if markets are high then all must be right in the world. After all, why else is the FTSE reported every hour on every news bulletin but to tell us the national financial mood?
And what is actually being reported is a fraud. The corporate world is not all right. It is out of ideas. And it is so bereft of ideas that it can't even run outsourcing businesses, which were said to be the easiest thing in the world to get right.
And as fiasco after fiasco shows, the reports of well being in the form of the financial statements are themselves manipulated, or just blatantly cooked.
No one knows where the tipping point for any crisis will come from. I am not claiming I do. But the charade that current stock market valuations represent will be seen through some time soon. Those values are being maintained by Ponzi schemes. And such schemes always end in tears.
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A similar manipulation of the mood was the reporting that UK growth had been revised upward – from 0.1 to 0.2% – hardly significant yet headline news of better growth!
Definition – A Ponzi scheme is able to maintain the illusion of a sustainable business as long as most of the investors do not demand full repayment and are willing to believe in the non-existent assets that they are purported to own.
Do you think Glaxo, Novartis, Sony, Shell, Gazprom, Siemens (as a random selection) have non existent assets?
You tell me this
How many have had to restate their accounts?
But i asked you a simple question in response to your statement about a Ponzi scheme. Please answer?
Sure I will answer
I will do so by asking you not to waste my time or my reader’s time
So the stockmarket isn’t a Ponzi scheme and the aforementioned company do have assets which deliver consistent profitability. It seems you were trying to sensationalise as you normally do.
How do you know either of those things?
Do you realise how absurd your extrapolation is, for a start?
Or the gross assumptions you are making?
As a percentage, very few companies have had to restate their accounts. I’d say 98% of listed companies haven’t had to restate their accounts. It’s the rarity that causes the shock.
Wow….you’ve never read accounts then
“Do you think Glaxo, Novartis, Sony, Shell, Gazprom, Siemens (as a random selection) have non existent assets?”
James you’re being silly,
It isn’t matter of whether they have assets or not. Of course they have assets, but does the share price reflect the value of those assets is the question.
And when stressed those assets are worth firesale prices.
A lot of people are going to get burned very badly. We’re not talking a few retail investors playing with their nest eggs, we’re talking pension funds and the whole shooting match and if you have the wit you were born with you must know that.
James is sea lioning.
How is an investor, whether acting on his own account or behalf of a client, supposed to be able to tell if a company has healthy assets if the auditors are covering up fraudulent representation of the company’s financial health?
Or if ratings agencies are giving triple A ratings to bundles of junk paper. ?
And if the regulators are turning a bling eye to accounting and auditing failures to report accurately……..
Ed Seedhouse says:
“James is sea lioning.”
I wish him luck in developing this useful circus skill. When the financial industry collapses he might find it a good fallback employment to appear in public places balancing [his] balls on his nose. 🙂
Passers by may give him their loose change.
James,
That’s a bullshit definition. Cite your source.
“The problem is systemic. In the US the problem is share buybacks,” Taking an example I know well: Vestas – the Danish wind turbine manufacturer – the company is buying shares back. However, it also has very very low debt & is profitable. The reason for the buy back is “what to do with the money”. Although renewables are expanding globally, it is still not happening very quickly – which means what to do with profits? – one can only expand production facilities in line with demand/winning contracts. If demand is not moving strongly ahead – what to do? (Answer: governments need to step on the loud pedal with respect to de-carbonisation). In a nutshell: the reasons for buybacks may vary depending on the sector.
So why buy back?
Why not a dividend?
Really? You can’t see the obvious differences in the two approaches?
I can see the differences
I asked for a justification
??? I could understand the War on Payroll in the ’70s and on, because Payroll was an expense, and made the P&L look bad, whereas Consumer Loans were assets, and made the Balance Sheets look good.
So I guess dividends would be an expense, but are shares counted as Balance Sheet Assets even when they’re the company’s own shares?
The advantage of share backs is they directly increase demand for the shares and so price
Dividends only do so indirectly
Not nearly so good for the boss’s bonus
I don’t know – but they have been doing it for a couple of years. Personally (& I’m a share holder) I’d prefer the money to be invested in production facilities – problem is, politicos in almost all countries are still gatekeepers with respect to renewables projects. Understandable if there is a need for subsidies – but in many parts of Europe, this no longer applies for either on or off-shore wind – which then raises an interesting set of other questions.
dont you need distributable reserves to pay a dividend – which are created from current and historical profits?
Yes
But under IFRS distributable reserves are not reported as required by UK law
I’m confused. Are you saying IFRS allows you to pay a dividend with no reserves? I’m sure I’ve seen IFRS accounts which show reserves on the balance sheet ?
Sir Philip Green did it…
But what I am actually saying is IFRS does not require that distributable reserves be disclosed
not disclosing it is rather different than being able to pay dividends without reserves I’m sure you would agree.
No I don’t, actually
Are you saying Philip Green paid dividends without distributable reserves? That would be illegal. I’m sure he didn’t.
Yes it would be illegal. I fear RM has got in a muddle on this
No I did not
http://www.taxresearch.org.uk/Blog/2006/06/19/sir-philip-green-the-rewards-of-tax-avoidance/
I know damn well I am right
I used the accounts as the basis for my comment
That sounds to me like paying dividends out of capital – like George Hudson did…
And look what happened…..
For those not familiar this was the railways stock market crash of 1849 as I recall
“For those not familiar this was the railways stock market crash of 1849 as I recall”
Not a lot wrong with your memory, Richard. 🙂
Some of these young people have very short memories. They get worse; the younger they are the shorter their memories.
I remember it well
I was long in the Midland at the time
(And that is a contextually appropriate joke)
😆 😆 😆
For buybacks I suggest reading Mazzucato (‘The Value of Everything’ – especially p.162-5). On the choice between dividend and share buyback: it can make a big difference to executive remuneration, and in some cases tax advantages over dividend payments. It also returns money exclusively to those who want to sell.
More generally it is often done because the management has no ideas for capital investment, is over-focused on EPS, and it is “done for the wrong reasons and …. …. [may] jeopardize a company’s ability to generate sustainable long term returns” (quote – Larry Fink, CEO Blackrock; in Mazzucato, p.164).
The crunch is that essentially buyback goes with shortermism, low R&D, risk-aversion and turning all value generated in the economy away from recirculating investment and growth in the economy (the only justification for shortermism is rapidity of capital recirculation in new investment), into a process designed to maximise the extraction of value from the economy; increasingly though the ‘financialisation’ of all surpluses through new processes in the banking and finance sectors to guide extraction to a narrow range of pockets within the banking and financial sector. We may call this ‘unproductive entrepreneurship’: or to give its ral name – rent-seeking.
I haven’t got to it yet….
Sounds spot on, as usual
What Mr. Warren says.
Yes, raising capital to pay dividends would meet the normal description of a Ponzi scheme and borrowing to pay investors is little different. Its pretty outrageous actually but there it is, plain as day in the Financial Times (Oh dear!).
Then there is that other concept of ‘Ponzi finance’ as famously described by Minsky in the Financial Instability Hypothesis and this case definitely fits the bill.
For those that may be unfamiliar:
https://www.bbc.com/news/magazine-26680993
https://www.economicshelp.org/blog/6864/economics/financial-instability-hypothesis/
http://www.levyinstitute.org/pubs/wp74.pdf
If Bernie Madoff can read this blog in his cell he must be really chuffed how much capitalism has learnt from his “rob Peter to pay Paul ” tricks! Why didn’t they see it coming said The Queen “because morality doesn’t pay” said the Mad Hatter!
Company Pensions. I remember when Cap’n Bob first made his notorious moves at The Mirror. What a lot of tut-tutting went on! 6 months later, they were all at it, the f**kers. That is the real reason why we are in such a pensions mess, now.
“If Cap’n Bob can read this blog in his Hell he must be really chuffed how much capitalism has learnt from his “rob Peter to pay Paul ” tricks!”
Excellent Minsky links, Marco.
Thanks for posting.
Interesting just how ‘bleedin’ obvious’ it is.
I particularly like the comment about mathematical models becoming increasingly complicated (so no bugger understands them), because this tallies with my own view of the cynical use of numbers being the best way to present lies to the uninitiated.
It takes a lot of control fraud ignorant mice to make a happy fat cat!
Richard, There may be an even worse problem of hidden debt. If a retailer borrows money to buy the freehold of a store, it goes on the books as debt. But if a property company buys the freehold and the retailer takes out a long term lease, the long term commitment does not appear as debt. Even though the retailer has a greater ongoing cost, it appears to be healthier. Similarly, if British Airways borrows to buy a plane, it appears as debt. If the airline leases the plane, it appears in better financial health, even though it is less profitable. I suspect apparent debt may only be a fraction of true debt.
You are wrong re much of leasing
Most is capitalised as if owned
I am not an expert, but is that not the worst of all worlds? The company claims to own the asset, but does not classify as debt the cost of buying it. As an amateur investor, I got caught out by Debenhams, whose shares appeared to be cheap, with manageable debt, but had ongoing rental agreements which would turn a tiny fall in profits into immediate loss.
I fear that time of rent is deducted as a simple cost
If you wish to say accounts are misleading I would agree
I note from the FRC website “There has been no statutory definition of ‘true and fair’. ” Anyway, please, please keep up the good work.
That is not true
The FRC know otherwise
True and Fair is the ability to pay a dividend out of retained reserves
If that is not possible the accounts are not true and fair and the creditors are prejudcied
This ties in with the Fu**ing blog. Thatcher, Reagan, Clinton et al have had a bonfire of regulations so anything goes, as long as the rich can make their money, and they have f**ked the ordinary citizen, as “only the little people pay taxes” and the cleaner pays a higher rate than the billionaire. It’ll be too big to fail once again. As Private Frazer said: “we’re all fu**ed”.
G Hewitt says:
” As Private Frazer said: “we’re all fu**ed”.”
Hmmm…. I must have been watching an expurgated version of Dad’s Army. 🙂
Richard, I agree with your analysis but does it make any difference how shareholders in receipt of dividends and share buy-backs use these funds? Say to invest in public authority bonds (if they were available) or spend, rather than save elsewhere?
How do we know?
And should tax differences (which are potentially significant) permit that bias?
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This is very weird
Right wing USA seems to like me….
I should tell Tim Worstall
Traction. !!
[…] Stock markets look ever more like Ponzi schemes […]