I don’t find yields over 10% given the current economic climate to be unreasonable or evidence of “desperation” on the part of sellers. I would probably find rates of under 10% as evidence of desperation on the part of buyers...
https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T10YIE
Which means these high yields are more of a sign of high risk of default than of high inflation. :-(
At least not in the current form it is measure as a CPI while ignoring asset price inflation in real estate and stock markets.
Whether that is a bug or feature remains to be seen, but for most people a psychological effect of large inflation has been present at least since the last big ceisia in 2008. Banks keep flooding the economy with new QE money and asset prices and rent payments keep increasing. Many people are not able to afford housing and birth rates plummet for not being able to have stability necessary to raise a family.
Whether somebody adds a patch to the inflation theory such as the concept of Biflation (inflation in asset prices, deflation in cheap goods manufactured by robots and imported from China at the same time) or throws thr concept of inflation out of the window completely is the question for economists for this century.
The fact that the economy is "pretty bad" doesn't necessarily imply that all rates should be low or high. They can be either very high (inflation) or very low (deflation), and both are not good signs.
Could you explain this more?
All the same, people are willing to extend loans because they are long on the economy, recovery, and return to normalcy. The engines are starting again.
The biggest issue was that companies were over-leveraged with debt. Maybe we'll learn a lesson from this, although I suspect opportunity cost will prevent many from being more prudent.
https://ftalphaville.ft.com/2020/04/30/1588254981000/How-sho...
https://www.afr.com/markets/debt-markets/why-the-rba-is-lend...
That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury bonds!) despite having over $200B of cash on hand. If your hurdle rate is 2.5%, surely your profitable business can return more to shareholders than that, so you should binge on this capital source? (Or even, as Apple claims it will do, distribute this directly to shareholders via buybacks & dividends.)
Also, I would qualify your statement that people are not necessarily long the economy in the short-term, which is where credit markets have miraculously thawed; they're long the fact that they will undoubtedly be able to get credit from yet someone else (namely, the lender of last resort).
This is why Apple keeps asking for a “tax holiday” to bring all this money back home to the US.
And this is exactly why you should have a cash stockpile, either as a company or an individual: You can never tell when a random event will completely wipe out your earnings for 6 months.
I'm no corporate financier, but I've certainly heard arguments in favor of borrowing money during times of low interest rates in order to have a cash stockpile. But borrowing to do stock bybacks when you don't have a stockpile is just skating further out onto thinner and thinner ice.
moral hazard through the roof
A bailout rewards the less prudent companies at the expense of the more prudent ones who cannot take advantage of their junk competition.
The engines are always on, when prices/yields are allowed to appropriately reflect risk, without interference or intervention. One of the most important functions of an unobstructed free market is price discovery.
I suspect people will not evolve to be more prudent unless there are some regulatory changes.
Some shareholders were expecting a government bailout, and got a real beating. They're going to think twice about expecting a government bailout the next time.
Are you arguing we should tax all of that as well? Or just one specific type of expense?
https://fred.stlouisfed.org/series/TB3MS
Take a look at the T-bill rates in the 80s. To straight-faced say "I'm not concerned about these rates," and make a comparison to interest rates in the 80s is ignorant at best. There was an intentional effort by the government to raise rates in order to fight inflation. We are so far removed from the interest rate environment of the 80s...
Bank of International Settlements is the central bank of central banks. https://en.wikipedia.org/wiki/Bank_for_International_Settlem...
Do you have any data to back this up? Some quick math shows annualized S&P 500 Return with dividends reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1]. Housing price per square foot hasn't really changed for most people either [2].
[0]: https://dqydj.com/sp-500-return-calculator/
[1]: https://en.wikipedia.org/wiki/S%26P_500_Index#Performance
[2]: https://www.supermoney.com/inflation-adjusted-home-prices/
OTOH perhaps we should give the author of The Wealth of Nations more credit for having anticipated the phenomenon of inflation back in 1776.
this also partly depends on your expectation on the availability to resell the stocks later on if desired
Off the top of my head, two simple arguments why excluding interest from business expenses does not make sense, there probably are a bunch more:
1. Double taxation - if I my operating profit is $100 but I pay all $100 in interest, then that $100 gets taxed twice; when I receive it and when the lender receives it. Such double taxation is bad because it arbitrarily changes depending on where you put the "legal entity boundary" - if the "earner" and "lender" were a single entity, then they would pay much less taxes; so such a double taxation regime would result in large financial incentives towards vertical integration of conglomerates and artificially punish fragmented businesses, which is generally opposite from what we'd want to facilitate.
2. Introducing asymmetry between owning and renting assets. Rent is considered a business expense (if the proposal wants to change that as well, then it's a much bigger change with other considerations), so any current scenario where a company is borrowing money and using it to buy capital assets (buildings/cars/land/machinery/whatever) can be replaced with an equivalent deal where the "lender" is buying the assets and leasing them. If interest does not reduce taxable income but rent does, then a huge portion of commercial credit would be restructured overnight to leasing for an arbitrary artificial reason, so you would not really gain that much extra tax revenue but would introduce all kinds of bad economic incentives (it's generally better for all the business domain-specific assets such as custom machinery to be on the balance sheets of the companies where they're useful, not belonging to generic lenders, especially in various economic crisis situations) for no good reason.
If you want to tax companies more, just raise the tax rate. Adding various artificial rule differences just adds complexity and all kinds of perverse incentives to structure transactions in weird ways so that they fit the arbitrary distinctions created by these rules.
Saying "today, interest is a special kind of expense that's taxed more" is effectively a subsidy to law and accounting firms to restructure all the corporations so that they do the same business without having transactions that technically are "interest". Case in point, Islamic banking system where interest is prohibited as such - lenders still earn the same money from lending (e.g. Murabahah gets you almost the same end situation as "normal" western loans), it just has to be structured in complicated ways.
The terms of the emergency loan was a certain debt:equity ratio, so in order to qualify, their very high debt load had to be reduced.
This could be accomplished in any way the company desired, and it turned out that the only viable pathway was to allow bondholders to convert their loans to new shares at a favorable price. This led to a 95% dilution for existing shareholders.
If they hadn’t done this, proper bankruptcy would have been the next step.
Just think - if nobody is flying, who is renting all those cars?
[0]: https://www.cnn.com/2020/04/05/us/airport-fires-cars-trnd/in...
The government is expecting the loan to be repaid, and to make that expectation likely, they're requiring the company to use market mechanisms to strengthen its balance sheet. The result in this case is that existing shareholders are practically wiped out.
In the case of Norwegian, this is pretty clear-cut. They've been on the verge of bankruptcy before, and their losses now are mostly due to foreign routes shutting down. Even if you accept the somewhat dubious rhetoric that compensation is mandated when losses are partly due to government involvement, it doesn't apply to this case. There was no way they could service their debt during the Covid crisis.
Some sharehoders were expecting the government to give an unconditional loan to be defaulted on later, or participate in a stock offering at prices high enough to preserve their ownership percentage.
This is an unequivocal message to shareholders not to expect that sort of rescue operation in the future. Run your company with a debt ratio that will let you survive unexpected hardships, or accept the risk of facing such hardships on your own.
It makes all sense that a bondholder may calculate that liquidating the company and selling off the assets will allow them to recover more of that debt than having the company continue operating. If so, bankruptcy is preferrable - and if others disagree and believe that the company will be profitable, the bankruptcy process allows various ways that essentially allow the "believers" to gather funding to pay off/buy out "unbelievers".