-->schon etwas älter, aber trotzden noch ein Blick von Paul Kasriel, Northern Trust, auf die GM Anleihe:
<p class="clsSubHeadline">There You Go Again?
July 07, 2003
When I heard the news that GM planned to use the proceeds of its recent $17 billion bond sale to top up its underfunded pension plan, I immediately recalled President Reagan’s response to Fritz Mondale in one of their debates: “There you go again.” The “go again” is the use of Fed-created credit to purchase assets, specifically, stocks. Presumably, that is what GM is going to buy for its pension plan with these borrowed funds - stocks. This is akin to what happened in the 1980s and again in the late 1990s - corporations borrowing funds, in part, to purchase stocks with. In the 1980s, at least, the Fed was not so active in creating the credit that enabled corporations to buy stocks. But the Fed was a major “enabler” in the late 1990s and is again today.
Chart 1 illustrates this point. Notice that the net equity issuance by nonfinanical corporations plunged into negative territory during the decade of the 1980s. That is, nonfinancial corporations were actually retiring equity. Notice also that nonfinancial corporate debt was rising relative to the value of assets owned by nonfinancial corporations. This implies that some portion of these borrowed funds were being used to pay for purchased stock. In the 1980s, leveraged buyouts were all the rage. Outside “raiders” were floating bonds, the proceeds of which were used buy corporations. This resulted in the retirement of the stocks (equities) of the acquired corporations. Let’s fast forward to the second half of the 1990s. Again, net equity issuance of nonfinancial corporations plunged into negative territory - even more negative than in the 1980s. And, again, corporate debt-to-asset ratios climbed. But in contrast to the 1980s experience, it was not outside raiders leveraging up Corporate America, but internal senior management. <strong>The biggest bull market in stocks in the history of America was accompanied by a net decline in corporate equities. In both cases - the 1980s and the late 1990s - stock prices were being bid up by corporations themselves through the use of borrowed funds. GM’s latest bit of financial engineering is just a variation on the theme.</strong>
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Now, if the funds corporations are borrowing to purchase stocks with are generated through the saving of some entity, these corporate purchases of stocks are <em>not</em> necessarily of a “bubblicious” nature. However, if the Fed, through its agent, the commercial banking system, is a major supplier of the credit, then these corporate stock purchases have the potential to contribute to a stock market bubble. This is what occurred in the late 1990s. Chart 2 illustrates this point. Along with the net issuance of nonfinancial corporate equity, Chart 2 shows the net acquisition of financial assets of the U.S. commercial banks as a percent of nonfinancial sector borrowing. As Fed Governor Bernanke said last November, the Federal Reserve System can figuratively print money. That is, the Fed can create money “out of thin air.” It is this legal counterfeiting of money by the Fed, if you will, that allows banks to create credit. If the Fed doesn’t create the extra money, more accurately, the monetary reserves, the banking system cannot create extra credit. The higher the proportion of nonfinancial sector borrowing is the banking system’s acquisition of financial assets, the higher the “inflationary” bias. By inflationary, I refer to price increases - price increases that include those of goods and services as <strong>well as assets</strong>. If the Federal Reserve, through its agent, the banking system, is providing relatively more credit to the economy, the bias will be toward higher prices of something - good, services, and/or assets.<br />
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Chart 2 shows that in 1980s, when leveraged corporate buyouts were responsible for the net retirement of corporate equity, commercial banks’ relative provision of nonfinancial credit was declining. <strong>In contrast, in the late 1990s, when corporations were buying back their own shares hand-over-fist with borrowed funds, banks’ relative provision of nonfinancial credit hit post-WWII record highs.</strong> The Fed’s inflation of credit manifested itself in the form of rising stock prices.<br />
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This brings us up to today. As mentioned at the outset, GM is floating bonds in order to use the proceeds to buy stocks. For all I know, individuals might also be floating bonds—that is doing equity cash-out mortgage financing – to buy stocks. What makes today’s situation similar to the late 1990s is that the Fed, in conjunction with the banking system, appears to be a major supplier of this increased credit demand. <strong>As shown in Chart 3, bank credit - the sum of banks loans and investments - is up almost 11% in the 52 weeks ended June 18, 2003.</strong> In recent weeks, year-over-year bank credit growth is the strongest it has been since September-October 2000.
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Don’t get me wrong. There are fundamental reasons why stock prices might be expected to be rising now. The tax rates on both stock dividends and capital gains have been lowered, making stocks a more attractive investment. Corporate earnings have improved and are expected to continue to do so given an improved economic outlook. But if the Fed is providing the financing of leveraged stock purchases of corporations and/or individuals, then stock prices are receiving a bit of an artificial extra boost. Nevertheless, it all counts in the box score, so to speak. And I do not see the Fed becoming unwilling to finance these leveraged stock purchases in the foreseeable future. Moreover, state governments such as my own, Illinois, are floating bonds to finance the purchase of stocks for their pension funds. So, happy days are here again - until, perhaps, the Fed decides to cut back on spiking the punch. And that is not likely to begin until at least a year from now.
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