Leverage this. If you are looking for reasons to worry about the stock market, few things beat U.S. corporate leverage. Excluding banks, which have very different dynamics, corporate debt has never been greater as a percentage of gross domestic product. The following chart comes from Deutsche Bank AG chief global strategist Bankim Chadha, who last week attempted in a report to show that the corporate debt issue had been overstated. He makes some very valid points, but it still appears we should be concerned about the debt that companies have taken on while interest rates have been historically low. Chadha argues that we should be more interested in net debt, which subtracts out cash holdings, and compares that to profits rather than GDP. After all, it is from profits that the debt must ultimately be repaid. This leads to a radically different picture: He also points out that leverage is heavily concentrated in the most relatively safe and boring sectors, led by utilities and real estate, which have reliable cash flows: This, along with a lot of other very impressive number-crunching, stands up Chadha’s headline: “Is Corporate Leverage High? No, It’s A Sector Story.”In particular, it is a story about utilities. On this basis, it seems there’s far less to worry about. Among the larger companies in the S&P 500, the debt has largely been taken on by those companies best placed to pay it back. The problem of over-leverage is not as sweeping or systemic as it appears. But there are still reasons for concern. Deltec produced the following analysis last month. Rather than compare to profits, which many believe to be unrealistically high, the following chart compares investment-grade net debt to earnings before interest, tax, depreciation and amortization, which is a decent measure for cash flow. Non-financial corporates look almost as leveraged on this measure as they have at any time since the peak hit during the dot-com boom two decades ago. Excluding the tech sector, where companies are able to borrow against impressively high cash flows, corporate investment-grade debt looks as though it is at a historic high. Even if the debt is primarily taken on by companies with relatively strong cash flows, it is worth asking why they did not borrow so much before: To illustrate this problem in a slightly different way, try this chart from Andrew Lapthorne, the chief quantitative strategist at Societe Generale. In the era of quantitative easing following the financial crisis, net debt has increased far faster than cash flows: True, the problem was ameliorated a little by last year’s big repatriation of cash, but it is still an issue. A further issue highlighted by Deltec and others is the obvious and persistent dilution of credit quality. Just look at this: Debt with the highest AAA ratings has almost ceased to exist. And the greatest increase in debt volume by far has come in the lowest-quality investment-grade credits and in below-investment-grade. It looks like corporate borrowers are gaming the ratings firms (and not for the first time) by making sure they borrow as much as they can while not suffering the downgrade that would lead to higher borrowing costs. While Chadha’s numbers are for the larger companies in the S&P 500, Lapthorne produces this alarming data showing that the net debt of the smaller companies in the Russell 2000 has run far ahead of their cash flows: This is alarming, even if it does not imply a risk of imminent disaster for the S&P 500. The presence of leverage increases risks and it is plain that a lot of companies have taken the opportunity to stretch themselves to an unprecedented extent. Even if this corporate leverage doesn’t drive investors out of equities broadly, balance-sheet quality is likely to be a critical issue for anyone picking stocks. Avoiding the many companies that have over-levered looks imperative. Waiting for Brexit. The saga of the U.K.’s attempt to leave the European Union is beginning to feel like Samuel Beckett’s “Waiting for Godot.” Despite much excitement and angst, little to nothing has actually happened. Godot — or an exit from the EU — has not arrived. In the play, he never arrives, but the latest news suggests we may get a “Casablanca”-like dramatic ending. We are reaching the moment when push comes to shove. Perhaps fittingly, it fell to the Irish government to announce that U.K. Prime Minister Theresa May was heading to Strasbourg, France, for last-minute talks with negotiators on behalf of the rest of the EU. This is a positive sign. Neither side would be wasting their time on a meeting if there were not some chance of substantive success. The currency market evidently read it the same way, with sterling enjoying a huge rally. Will this work? I still doubt it. Former Prime Minister Tony Blair may be unpopular in Britain these days, and his intervention will do little or nothing to change the debate, but I think his analysis inthis video posted on Twitteris exactly right. The U.K. government has made incompatible promises to different people, and this cannot be resolved, or at least not overnight in one meeting in Strasbourg. The significance of the Strasbourg meeting is that May is hoping to win changes to the withdrawal agreement, which has already been heavily defeated once and stands to be defeated again when it comes to a vote on Tuesday. Marc Chandler of Bannockburn Global Forex LLC summarizes what should happen next: Brexit comes to a head. By nearly all reckoning, the Withdrawal Bill will be resoundingly defeated in the House of Commons on March 12. The margin of defeat may not match the first rejection, but it will be the death knell to the path that had been negotiated for a year and a half. On March 13, the House of Commons will vote on leaving the EU without a withdrawal agreement.Most, except the most extreme partisans, think that such an act would result in a dramatic economic shock in the first instance. In any event, there does not appear to be a majority favoring such a course. On March 14, the House votes on postponing Brexit. There are several considerations here. Those who favor Leaving are suspicious that a delay means dilution or, even worse a reversal. Then there is a question of delay. A short delay may not resolve anything. A long delay is complicated by the EU elections at the end of May, and the protracted uncertainty is not good economically or politically. Investors will be incredulous if this measure also fails to secure a majority and a violent market response is likely. I tend to agree with Blair that at this point a long delay would be the best outcome, but as Chandler says, markets would hate it. A short delay would solve little or nothing. There is still a slight chance the House will vote to leave the EU without an agreement, which would make for the worst economic outcome of all. And it is still possible, but also unlikely, that MPs will agree on holding a second referendum if there is a long delay. That outcome is the only feasible way for the U.K. to get out of Brexit-ing altogether, but it would amp up uncertainty and angst a lot in the interim. And it is far from clear that a majority of Britons want to retreat from Brexit-ing. Whatever May manages to present to Parliament on Tuesday, the bottom line is that Godot is still a long way away. Looking for literary winners. We should be getting rolling shortly on a book club, but I would like to ask some questions of the readership now. The idea is that I will attempt to guide you through some great books, all of which have at least some relevance to the topics of markets and investing that I write about. (Thankfully, a lot of other things in life can potentially move markets, so this leaves a wide field.) We might try reading a new book from time to time, but I am working on the assumption that the answers to today’s most important questions can be found in books written long ago. I hope this will turn into a journey through some of the most significant books written on finance. So, which are the most important books? My decisions will be final, but I appreciate your suggestions. We also intend to make this transparent. So, please let me know your nominations for the most books that shaped your professional life. (We will exclude the Bible and other religious texts, which are beyond my pay grade). To jog minds, there are a few lists out there that are worth reading. Business Insider tried naming the 27 “most important” books ever written about finance two years ago. You can find their listiclehere. I added another eight books in my old newsletter, which you can findhere, after a commentary on the Dow Jones Industrial Average’s failure to breach 20,000. And perhaps the most ambitious attempt to adjudicate the most important books about business is the Business Book of the Year, led by my old friends at the Financial Times in conjunction first with Goldman Sachs and more recently with McKinsey. You can find a list of the winners, and of the nominees that made the short lists,here. Please let me know of any additions that should have been made to all of these lists. And if you have nominees for the most important business book of all time, also do let me know. I will be trying new ways to make this discussion interactive, and hope to involve both the terminal and the Bloomberg.com website. For the time being, can I ask that people experiment by using the comment function on the website version of this newsletter? That way, all comments are public, my replies can be seen by everyone, and we can have an open conversation. Comments below the line have a bad reputation for being dominated by the bots and trolls that bedevil much of online life, and for bringing out the worst in human nature. But there is no need for this to degenerate into a Twitter fight.You may say I’m a dreamer(couldn’t avoid yet another Beatles/John Lennon reference), but I’m sure I’m not the only one. Let’s have a civilized and insightful conversation online. Like Bloomberg's Points of Return? 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Tudor Jones Says Next Round of China Tariffs Could Tip Us Into a Recession(CNBC) Hedge fund billionairePaul Tudor Jonesbelieves the market is underestimating the economic impact of tariffs. “We’ll really have to see the impact they are going to have and if the next round of tariffs gets implemented. It’s a huge deal. I would say if they get implemented and we go to the $500 billion, I think certainly it’s possible it could tip us into recession,” Tudor Jones said in an interview on Bloomberg TV on Wednesday.
%% Good charts; shows why info tech has tended to do very well +Leveraged Real Estate+ or REITs have not done so well -long term= too much debt, ,