Quote:
Originally Posted by chassis
Hi WestRace,
Thanks. Are you able to share your employment status and investment horizon?
What do you make of this chart, updated in June of 2019 by the Federal Reserve? It shows corporate debt to market value of equity at a decades low level. Is this good in your mind, or is it bad or scary?
https://fred.stlouisfed.org/series/NCBCMDPMVCE |
I suppose you could look at this two ways:
1. Corporate equities are artificially high because of the stock purchase buy backs.
2. Or debt is not an issue.
A better way to measure debt is using "as percentage of GDP" because corporate equities such as stock can fluctuate quite a bit. For example, if a corporation stocks for whatever reason falls by 35% (which could happen alot), it's debt to equity ratio can go up substantially.
US Steel corp. debt/market cap is somewhere between 100% to 50% during the past 12months because its stock has fluctuated a lot.
Also as I mention, because of QE, a lot of the corporate debts are effectively being held by the FED and the FED won't likely to go under. So the FED is not only being used as a "put" for the market but also a "backstop" for all our corporate debts.
Another variable to consider is a lot of US corporations are multi-national compared to the past. For example, most of the stuffs imported from China actually come from US companies. Using debt to US GDP ratio may not be accurate as vs. in the past. A lot of US companies generate quite a bit of GDP in other developing countries. So you have to take into account debt/GDP (US + non US GDP). A more accurate way is to measure debt to corporate revenue or profits or something that is not just US centric.
It's hard to know and usually we can only find out after the fact.