Fidelity chief warns of global corporate solvency crisis | Hacker News Reader

Fidelity chief warns of global corporate solvency crisis

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54 pointssamizdis70 comments

Paywall bypass link: https://www-ft-com.ezproxy.babson.edu/content/d6fd7d11-c06e-...

I wonder what the proportion is between pre-pandemic debt (fuelled by quantitative easing and low interest rates seemingly)and debt accrued during the pandemic?

Is it that the pandemic has uncovered a long-standing problem of high corporate debt since the 2008 Financial Crisis fuelled by quantitative easing and low interest rates? What other factors are at play here? Or am I completely wrong?

Hasn't the the vast majority of recent QE been done as a direct response to the pandemic? (Legit question, it's my impression but may be misinformed)

no. the pandemic triggered the 4th big one.

And when was the 3rd?

QE3 was 2012-2014: https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...

Is that at all surprising when you have corporate execs, hedge funds and private investors reaching into the cookie jar, not with one hand, but with both and shovel out the money into their bank accounts?

“The biggest U.S. airlines spent 96% of free cash flow last decade on buying back their own shares.“

“In 2018 [...] companies in the S&P 500 Index did a combined $806 billion in buybacks, about $200 billion more than the previous record set in 2007.“

https://www.bloomberg.com/news/articles/2020-03-16/u-s-airli...

https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...

The thing is, the return of cash to investors (or growth) is kind of the point of investing; whether that's dividends or buybacks is a matter of tax treatment.

(Execs looting is a bit more of a problem)

It is not the same. Dividends reward continued investors who also have a bigger incentive to care about long term health of the corporation. Buybacks reward those who deinvest (sell shares).

Not really. A buyback makes your shares inherently worth more on a per share basis. If you compare it to a reinvestment of the dividends (DRIP), then it's really equivalent, except that one is a taxable event but not the other. You're always free to sell shares in any scenario if you need the capital since the stock market is generally pretty liquid.

If the company jettisons 2% of its book value in a buyback, sell 2% of your shares. Practically speaking it isn't easy but there is no theoretical problem.

It might have changed, but there was a time when companies would have to be stark raving mad to return money as an income stream rather than a capital return. It made no sense after accounting for the tax code.

The problem with dividends is they force a taxable event onto shareholders. Many shareholders prefer buybacks because it lets the shareholder control when to get taxed by selling shares.

Either is a wash when it comes to caring about the long term health of the company. If all my gains are through buybacks I absolutely care about the health of the company at least until the point I sell.

Why is that a bad thing? The money gets deinvested and then reinvested into other growth companies, giving them a chance to grow as well.

Is there evidence that the returns are “reinvested into other growth companies”?

Why would a growth company return money to investors? They should be using that capital to grow.

Two reasons that come to mind:

1) Not all growth is easy or cheap. Investing $X to grow by Y% doesn't mean you can invest 2$X to grow by 2Y%. At some point the ROI is close to zero or even negative, though I would agree with risk-free interest rates also close to zero, nearly any positive ROI is better than cash distributions.

2) Some investors want a portion of profits to be distributed when a company is doing well. Investing in growth is a risk, distributing cash is not.

Once the value of distributing profits outweighs re-investing in growth, you are no longer a growth company.

Because you’re not going to be a growth company forever, and growth companies are where the money is at. So distribute your profits and let’s put that money into other companies ready to explode.

Buybacks are used to pump EPS and hit quarterly/annual stock price targets for execs.

Governments have allowed and encouraged companies to become too big to fail. They have failed to evolve anti-trust laws to our modern age of information monopoly, this would of encouraged more openness and competition. Now when these mega-corps run into difficulty they get bailouts. This is definitely not capitalism. All of these companies should be forced to hold reserves given their systemic importance to various industries.

> The biggest U.S. airlines spent 96% of free cash flow last decade on buying back their own shares.

Imagine a family with a really detailed budget. They lose their house, out on the street. Big financial problems. Someone comes up to you and says "they spent 96% of they money they budgeted for holidays on - get this - travelling and holidays".

There might be problems there, but the FCF is defined as "what is available for distribution among all the securities holders" [0]. It is perfectly reasonable for 96% of it to go to buybacks.

There are a lot of problems with the buybacks and I liked the article; but the 96% quote is meaningless.

[0] https://en.wikipedia.org/wiki/Free_cash_flow

Bad analogy. Why are they going on holidays when they are going to lose their house? Cancel the travel and pay the mortgage.

That is part of the analogy too, I chose it with some care.

And besides you'll have no trouble imagining a scenario where cancelling the travel wouldn't have helped.

EDIT - And if they did that then they'd arguably be spending 100% of their budget for holidays on holidays.

Canceling the travel wouldn't have helped who? For sure it would have helped the people they owe money to. Just because my own finances can't be saved doesn't mean it's vacation time and screw my lenders. So no, I cannot imagine a scenario where canceling the travel and attending to obligations would not help.

Crikey. (1) That is a failure of imagination - maybe the breadwinner was run over by a car so the mortgage become unpayable, but up to that moment they were exemplary debtors. (2) Owing someone money doesn't mean suddenly a person is a debt slave who has to devote their whole life to the loan. They still get to discretion to make decisions about their own finances. (3) Forcing someone to live a life that spartan might increase the risk of them defaulting on the loan. Speaking as a tiny-sometime-lender, I wouldn't insist on that for anyone who I lend money to.

Analogies are like jokes. If you have to explain them... I stand by my original observation. It's a poor analogy.

There is a real opportunity for you to learn here though. Don't compromise your quality of life out of some sort of misplaced feeling of loyalty to people who lend you money. It is a commercial contract and you should try to honour it, but you are allowed to live a full life even if you owe someone else money.

> There is a real opportunity for you to learn here though.

That comes off as condescending. You assume I don't already have a set of well thought out values around debt that I am quite happy with.

It's not that difficult. I just live the same way I would expect someone to live if they owe me money. That keeps me honest on both sides: I treat my debtors with empathy. And I treat my debts with the same seriousness of a contractual obligation that I would hope my own debtors do.

But if you decide your five star hotel holiday can't somehow be downgraded to a smaller budget while simultaneously defaulting on loans, the average person will have zero sympathy. The problem with "allowed to live a full life" is that too many people define that as something that is far beyond their means.

There's a name for not paying debts - deadbeat. No thanks.

In the US and elsewhere, the pandemic has shown some dangers of too much reliance on JIT, just in time stocking and use.

Just in time income seems to be as risky, if not worse.

In both cases, everything's fine as long as everything's fine.

EDIT: Mildly interesting side note: I'm an OTR semi truck driver. I am sometimes assigned trips that are designated JIT. There is usually a note included with a JIT trip stating that late delivery will result in work stoppage at the destination.

> I'm an OTR semi truck driver. I am sometimes assigned trips that are designated JIT. There is usually a note included with a JIT trip stating that late delivery will result in work stoppage at the destination.

Interesting. Do these trips pay better for the associated stress on your part?

No, same pay (but I'm only one guy in one company). And they're really no more stress than any other trip, they just require that you pay a little more attention to your legally available hours, and you communicate any problems immediately, so that CSRs can do what they do.

One thing that could happen is that the trailer could be taken from you, and assigned to a different driver who isn't having a problem with legally available hours. https://en.wikipedia.org/wiki/Hours_of_service

We entered this crisis with record levels of household, corporate, and government debt worldwide.

Quoting from a World Bank report warning about record global debt levels on December 19, 2019 -- three months before the lock-downs:

> The global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies. The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies. Their total debt has risen by 54 percentage points of GDP to a historic peak of almost 170 percent of GDP in 2018. Current low interest rates mitigate some of the risks associated with high debt. However, emerging and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks.

Source: https://www.worldbank.org/en/research/publication/waves-of-d...

The western economic system cannot deal with lockdowns, and more generally, any kind of stop-the-world scenarios.

What will be most important now is how the west will be able to deal with this crisis in comparison to China.

If the Chinese system is able to deal with the crisis more effectively in economic terms, this may put the western system as a whole in jeopardy, in particular values like freedom and privacy.

A very good point (and I'm not a china shill). China's philosophy is The State Above The Individual, so it is willing to trade off a many more deaths, in theory. The west is The Individual Above The State (or at least to a much greater degree), so in theory we should do worse.

However the west has imposed large scale quarantines so the collective is in fact valued (because most people understand them paying a some cost will benefit others).

Also china is not an ant's nest, and the government can't go mad or their government will become unstable and even overthrowm.

We're not so totally far apart. I don't know. My feeling in good times the west does better, in hard times authoritarianism does better. We're in a hard time. Things will change. Also china and the west are entangled economically (so you can't examine each in isolation), so if the west does worse, china suffers economically. Also china's allegedly been misusing cash - the tide's going out, who's (more) naked? It's a good question.

But that's not what we've seen is it, China has worked hard to minimize the number deaths by going really hard on a heavy lockdown early, while the US with 1/4 the population has dithered and not really mobilized the resources of its state and has 24 times as many people die as China has.

I think it's more that modern China has been prepared to do everything it can to minimize death in this case and by doing a serious lockdown along with serious contact tracing they've come out early and are able to reopen their economy

Some countries in the West have done the same and are in a similar state. Others have fiddled why their countries have burned.

>has 24 times as many people die as China has

This is predicated on the CCP numbers being accurate, which according to multiple intelligence sources is false. [1]

They also made systematic attempts to withhold information from the WHO. [2]

[1] https://www.bloomberg.com/news/articles/2020-04-01/china-con...

[2] https://www.theguardian.com/world/2020/jun/02/china-withheld...

I wouldn't put too much stock in their exact numbers, but it's not realistic to think that China has had 24 or 12 or even 6 times as many deaths as publicly reported, let alone on a per capita basis.

China has 18.7% of the world's population and 0.00018% of the current coronavirus cases [0], if you believe their reported numbers. So yes, I'm willing to believe there are vastly more deaths than reported as well.

[0] https://www.worldometers.info/coronavirus/#countries

Why is it not realistic? The CCP numbers are essentially propaganda and have no basis in reality.

The CCP claims ~4,600 deaths, while there are reports like 5,000 urns being delivered to a single mortuary in Wuhan alone (Wuhan has at least eight mortuaries). According to some reports 40,000 urns were distributed in the span of just 10 days.

That's one city!

While data from China is difficult to find (and transparency always questionable), a key issues in comparing the two populations is:

- General health. Covid-19 rarely acts alone, at least in The West. Preexisting conditions play a key role. For example, obesity and its "side effect" diseases pair well with C19.

- How it cares for its elderly. People in nursing homes in the US have been significant contributors to the death count. Is that true in China?

It helps to get into the details a bit. While the proof has vet to be studied, anecdotally, cultural differences appear to contribute to the success (or failure) of a given government's decisions.

And that's sort of my point, countries that are willing to act and act quickly (be they communist or capitalist) are faring well and are restarting their economies, ones who's governments have tried to ignore the problem and hope it would go away are doing poorly.

I live in NZ - we've had no new cases nationwide for 2 weeks, we have (AFAWK) 1 active case in the whole country. Our borders are largely closed, anyone coming in is subject to mandatory quarantine. When we went into lockdown it was fast and deep, and people honored it, we started quarantining visitors from China early, as a result many of our cases came from the US. Now we're coming out, carefully step by step, I went for a drink at the pub on Friday night, then went out to dinner - there's still mandatory social distancing and collection of contact tracing data - that may all go away next week.

My hardware hacker friends in Shenzhen describe similar careful steps - apparently street markets may be back this week. But when they arrive they have similar mandatory quarantines as we have in NZ - does the US do any?

As far as nursing homes I think it's traditional for older people to live with their kids they don't get warehoused as much as we do in the West. As I understand it one of the big worries in China was that it was CNY, the whole country was on the move visiting family (those grandparents) they locked everyone down before they could return and then moved people back, directly into lockdown

I think what you might have is correlation. On the other hand, cause does exist for preexisting conditions. I'll go out on a limb a bit and theorize that elderly parents at home is safer than a bunch of them together in (under funded?) nursing homes.

Acting quicker might help but the fwct remains that underlying cultural issue have a significant impact on outcomes.

Side note: In NY state - and perhaps elsewhere - a nursing home patient with C19 that transfered to hospital and died is _not_ a nursing home death. The percentage of nursing home deaths is high, and - at least in NY - undercounted.

Would we have locked down the whole country is NY and NJ (and Philadelphia) done better with nursing homes?

> And that's sort of my point, countries that are willing to act and act quickly (be they communist or capitalist) are faring well and are restarting their economies, ones who's governments have tried to ignore the problem and hope it would go away are doing poorly.

Shocking stuff indeed. You've set the world of epidemiology on fire. What's your point? That in managing a dangerous epidemic communism/authoritarianism does better, or relatively liberal western government styles do better, or that governmental styles are not relevant? Because that was the original question.

I think the point is that the attribute most closely aligned with Covid outcome is not liberal-authoritarian, but functional - crippled by political division.

No, my point was that decisive governments willing to move quickly who are also able to motivate their populations to move with them (be they capitalist or communist) are doing far better here than governments whose leaders just put their fingers in their ears and tried to ignore the problem.

I lived in the US for 20 years, half my adult life, people there pride themselves in having a national government that is structurally deadlocked and unable to make sudden changes ... while this may be a useful attribute much of the time there are times, and a pandemic is one of them, when the government has to move really quickly - if you've fired all the experts and are more worried that your party's investors will lose money than you are that your voters will die then you get just the wrong sorts of results

> decisive governments

Original question asked if the cap or com governments were intrinsically better at this. You're saying governments that don't screw up are better at it. Yes, but it doesn't answer the original question.

It's not so much governments that screw up, it's governments who trust the science, who are decisive and move quickly, and who's populations are willing to follow them - my argument is that it doesn't seem to matter whether they are capitalist of communist - some communist countries have done well (Vietnam, China), as have some capitalist ones (NZ, South Korea, Taiwan, etc).

I'm talking from a societal philosophy. If you absolutely insist on dragging stats into it, well, here goes:

China is incredibly monolithic in time (50 centuries of similar style of government, at least). The west is far more variable. The current US gov't acted like fuckwits, so deaths are unnecessarily high. Speaking as a brit, we've been even more fuckwitted.

I don't believe china's done as well as you claim. The fucked up early, downplayed covid, twisted the WHOs arm and plain lied about their infection and death stats.

Whether they reopen the economy early is of less-then-100% benefit if the rest of the world is not buying. If their economy isn't as healthy as they like to claim, this will hurt them.

But the bottom line is western governments can and do change. How china will fare I don't know. I remain where I started, I don't know which is better in these situations. The west may collapse, china may collapse, I can't see the future.

Quarantine doesn't necessarily benefit the state more than the individual. It benefits the collective more than the individual but the state and the collective aren't the same thing.

How do they differ? I considered them interchangeable. BTW, polite request, if you say something like this please give a link to something that explains where I'm wrong, it means I don't have to ask for useful stuff. Thanks.

I'm not a philosopher nor a political scientist, I'm not making a technical argument.

Are you asking about the inter change ability of the state and collective?

Did George Floyd benefit as much from the apparatus of government as Donald Trump? That's the difference between the state and the collective in my mind.

Or are you asking about inter change ability of individual and collective? I think it's pretty obvious...

I guess I was unclear.

> ...the state and the collective aren't the same thing

What's the difference? How in your view do they differ?

The state is composed of the institutions, elected and appointed officials bureaucrats, etc. The collective includes everything else. I'm a part of the collective. I'm not a part of the state.

Oh, ok. I treated them as synonymous. I can see how "the state" could mean its formal structures only, but I included everyone in it. I'll mind the distinction more carefully now.

> The western economic system cannot deal with lockdowns, and more generally, any kind of stop-the-world scenarios.

A strong statement, but lacking some proof. My guess is that just like mold, the economy will grow back, adapted to the new constraints. And while the players might be gone, with whatever pain that might incur, the game is still played by the ones who adapt.

> The western economic system cannot deal with lockdowns, and more generally, any kind of stop-the-world scenarios.

I kind of disagree, though it may just be a diction issue.

I think it's the western political system and freedoms that can't enforce a lock down rather than the economic system. Countries that have aggressively locked down early, enforced that lockdown, and instituted privacy invasive tracing apps have been able to virtually eliminate the virus from within their borders.

Compare that to the US, for example, where people are insisting on their rights to not wear a mask for purposes of protecting others. It's less about economy and more about individual freedoms and lack of state power to enforce lockdowns.

==I think it's the western political system and freedoms that can't enforce a lock down rather than the economic system.==

Is this true? Even within the US we have plenty of states respecting stay-at-home orders and making things like masks mandatory. Other Western democracies like Germany, Australia, New Zealand have fared pretty well.

It's interesting to see the fund industry angling for a share of the coming bailout ("we can help with recapitalisation). Tier one banks have made a lot of money managing TARP etc. This would be a nice new revenue stream for companies with razor thin margins. And it would give them (and hopefully their customers) more representation in the rooms these decisions are made in...

This is exactly what is happening. The fund management industry is encouraging and attempting to get their slice of the next bailout funds.

I do not understand why central banks are allowed to print money at low/close to zero interest rate. This will build up some kind of future subprime bubble where all the created cheap debt cannot be paid back. Central banks step in and save the financial system, more finance regulation is put in place but nothing is really solved. As an engineer working within operations, I cannot understand this as the root cause too much debt which cannot be paid back is not solved. Neither is the current economic system compatible with the environment. Common things we share like clean air and water and environment resources are not priced. You can profit from not being nice to the environment yet you do not pay for that profit.

what consequences would that have for the lower and low middle class?

Archive.md paywall bypass link:

http://archive.md/j2kcI

“In less than three months time, the Fed has done everything it did under QE1, plus everything it did under QE2, plus half of what it did under QE3!“

https://seekingalpha.com/article/4349214-fed-is-dead

How can there be a global corporate solvency crisis given the amount of money flowing from central bank spigots?

Unless, of course, corporations have used the very cheap interests rates of the last decade or so to buy back there own shares, which is great for shareholders but terrible for the economy at large.

https://www.visualcapitalist.com/stock-buybacks-explained/

So the stock market is going gang busters but many global corps are swimming in debt.

Wonderful.

edit: caveat – this obviously is a fairly simplistic caricature of the financial picture, but it's not entirely inaccurate!

The issue is that liquidity — the ability to meet short term obligations — and solvency — the ability of a corporation to meet long term obligations are not the same thing.

The fed has provided lots of liquidity. The crisis is in the “zombie corporation” question: the solvency.

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