Earlier this week, in “As Corporate America’s Interest Burden Collapsed, US Government’s Soared,” I took another walk through one of this cycle’s more interesting dynamics: Corporate America’s masterful (and in some sense accidental) play on the post-pandemic macro-policy progression.
It’s easy enough now, with the benefit of hindsight, to describe the monetary, and particularly the fiscal, response to COVID as “overdone.” Sure, a lot of people died, but as it turns out, creating safe and effective vaccines (America’s would-be health czar would dispute “safe” and maybe even “effective”) was short work. Science caught up with COVID at “warp speed” thanks — and it’s weird to say this — in part to Donald Trump, whose pedal-to-the-metal push to find a shot resulted in a veritable miracle.
But during the early days of the pandemic, no one had any idea how quickly (or not) modern medicine would overtake the virus, and most forecasters feared deflation, not inflation. So, it’d be ludicrous to suggest the C-suite had it all planned out when they took advantage of the Fed backstop to borrow huge sums at low, fixed rates. The idea was to hoard cash for the pestilent apocalypse, not to play the arb between “today”‘s artificially suppressed financing costs and “tomorrow’s” high cash rates.
Sometimes it’s better to be lucky than good, though, and quite often that’s a distinction without a difference if all you care about’s the end result. Here’s the end result:
The chart, from SocGen’s Albert Edwards, is another way to visualize the dynamic discussed in article linked here at the outset.
The red line is corporates’ net interest payments — so, interest paid out minus interest received — expressed as a share of post-tax profits. That metric outright collapsed when the Fed started hiking due to the juxtaposition between record-low fixed rates on corporate debt and soaring payouts on balance sheet cash.
As Edwards put it, corporate net interest payments plunged “due to higher rates.” The chart makes it clear: That’s a historical anomaly.
“Another unusual factor boosting US corporate margins is that higher interest rates lowered rather than increased corporates’ net interest payments,” Albert said, calling this “a shocking example of this time is different!”
