The Corporate Debt Bubble: Companies Spending More on Buybacks Than They’re EarningPaul-Martin Foss
The massive corporate debt bubble that exists in the United States today is perhaps one of the most under-reported pieces of financial news there is. Even when you do hear about it, it’s as though trillions of dollars of corporate debt is something ho-hum, so ordinary that it doesn’t deserve a second look. But the size of corporate debt levels today poses a serious and systemic threat to the US economy and to millions of investors who are betting their life savings on the continued growth in value of US corporate stocks and bonds.
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Overall corporate debt levels have increased over 50% since the financial crisis, thanks to the trillions of dollars of new money created by the Federal Reserve in response to the crisis. Corporations were lured by the prospect of borrowing money at low interest rates, enabling them to engage in business much cheaper than they were able to previously. But that led to an addiction to debt, one which many companies aren’t able to overcome.
Many companies chose to use the income from their borrowing to buy back stock shares. That results in a decreased number of shares outstanding, which raises a company’s earnings per share, a key metric that ties in to executive compensation. Companies throughout the economy have been engaged in these buybacks, as corporate executives seek to maximize their earnings while they still can.
2018 was a record year for corporate stock buybacks, with buybacks totaling over $800 billion for the year. Thus far 2019 has seen similar sized buybacks, as companies are trying to maximize their debt issuance while interest rates remain low.
In fact, 2018 saw total corporate earnings eclipsed by share buybacks and dividend payments combined. That’s a scary sign of a bubble that is out of control. Add to the fact that corporate bond ratings have been dropping as debt issuance has skyrocketed and you have a recipe for a major crash in bond markets that could affect millions of investors.
Between huge amounts of bond issuance, low yields, and high risk, bond investments just aren’t the sure thing that they used to be. Investors who stick to bonds in the hopes of having a safe and secure source of retirement income may find out the hard way that their trust was misplaced. They would be far better off investing their money in a gold IRA, trusting in gold’s proven ability to safeguard investor assets.