Land of the Free and Home of the Debt

This has been due mainly to the Federal Reserve quantitative easing. David Rosenberg, chief economist and strategist at the Canadian wealth management firm Gluskin Sheff, has stated in Barron’s that there is a 90 percent correlation between the growth of the Federal Reserve balance sheet and the S&P.

However, the biggest effect of the Federal Reserve actions is not on assets, but on liabilities. In 2008, high grade corporate bonds were 600 basis points above Treasuries; today, the spread is just 125. And, junk bonds have disappeared, in everything but in the name: five years ago, their spreads were 1,800 basis points, today, they barely reach 400 basis points.

That has enabled companies to get immense debts to pay for corporate operations. Two years ago, Apple issued, for the first time in two decades, $17 billion in corporate debt just to pay a dividend to its shareholders without touching the $100 billion it had stashed overseas. Now, its reserves outside the United States are $206 billion. Last month, Verizon did a record-breaking $49 billion bond issuance to pay the British firm Vodafone $130 billion for its 45 percent in Verizon Wireless. According to Societe Générale, even after deducting the cash pile, American corporates have a debt 15 percent higher than in 2009.

So, the S&P 500 rally has been used to increase corporate debt.

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