Financialization is wearing out its welcome

On the eve of Apple issuing a credit card (and following Carl Icahn's 2013 advice that "Apple should be a bank"), we seem to be reaching the end of financialization's dominance over the economy, a trend that started in the 1970s and has risen ever since — but the tricks are wearing thin. See for example, the notorious Brazilian corporate raiders 3G bought out Kraft-Heinz and tried its usual MO of goosing profits by squeezing suppliers, paying its bills late, and cutting costs at the expense of growth — only to have Kraft-Heinz's value drop by more than 50% in less than three years.

This pattern is repeating everywhere: where once corporate raiders could seize a company, loot it, load it up with debt and sell it on to suckers, now everything from energy bonds to shale gas are being pounded by the markets after private equity looters tried their usual shenanigans, to say nothing of GE being forced into a $15B write-down as a direct result of private equity engineering.

The debt-fuelled expansion of the financial economy seems to be reaching a breaking-point: financial assets are sitting at more than 300% the value of "real economy" assets, and debt has doubled since the financial crisis of 2008. Government bonds are being given failing grades by rating agencies, and the OECD is warning that private debt bonds are high risks for defaults.

Every time we write about financial engineering here, where raiders borrow heavily to cash themselves out and leave behind empty husks in place of once-thriving businesses, the comments are full of questions about why anyone would lend these grifters so many billions of dollars (sometimes these questioners imply that private equity and its lenders must know something we don't). But the answer appears to be the same as the answer to the 2008 crisis's most burning question: why did investors keep buying these obviously toxic, unstable assets? The answer: bubblenomics, irrational exuberance, a finance game of musical chairs where we all know that most of the chairs will disappear when the music stops, but we all cling to an unrealistic confidence that our chair will not.

In fact, low interest rates have papered over myriad political and economic problems not just for 10 years but for several decades. Total financial assets are now more than triple the size of the real economy. The corporate bond market is now worth $13tn — twice as much as in 2008.

Debt is, of course, the lifeblood of finance. But it is also the biggest indicator of future crises. The OECD, the Paris-based club of mostly rich nations, last week warned about the record amount of debt in the corporate bond market in its historically low ratings. More than half of investment grade bonds issued in 2018 were of the lowest possible quality.

This may amplify the effects of an economic slowdown that many feel is imminent. "The amount of corporate bond investments that may be expected to default in the case of an economic downturn may be considerably larger than that experienced in the financial crisis," the OECD said.

The allure of financial tricks is fading [Rana Foroohar/Financial Times]

(via Naked Capitalism)