from


(snip)"... the most disturbing trend over the past "New Normal" 4 years. What was also explained, is that instead of investing in CapEx and hiring, or said otherwise, real sustainable future growth coupled with benefits for workers and consumers, companies have little choice but to pursue shareholder gratifying, short-term IRR boosting "projects" like M&A, dividends and buybacks, or else feel the wrath of scorned shareholders who will simply dump said prudent company's stock and move on to the next company which is more generous with its declining cash flows, and puts shareholders above all.

This is summarized simply on the chart below.



It turns out that, however, that there is more to the story, and as the following chart from SocGen's Albert Edwards shows, not only are companies using up what actual free cash flows they have for such stupid stock boosting gimmicks such as harebrained M&A (just look at the recent fiasco between HP and Autonomy to see how rushed M&A always ends), and of course buybacks, but they are now levering to the hilt to do even more of this. Think Spanish and Italian banks using repoed ECB "equity" to buy back not only their but their sovereign's bonds. The last time they did this? The golden days of the credit bubble.



The chart above also shows the rise in bank lending in recent months: it is not going to retail borrowers for such trivial Uses of Proceeds as buying houses. It is going almost exclusively to IG and high-HY rated companies to pursue buybacks.

This is how Albert Edwards sees the problem in a note relased today:

The charts below show the source of this recent recovery in bank lending to the private sector. It is clear that loans to the industrial and commercial sectors (dotted line) have been the key swing factor over the last two years for driving overall bank lending.

It is also notable, looking at a longer term chart, how small bank lending to the industrial and commercial sector is relative to the real estate related and consumer category, the former being some 3x larger. Yet despite the moribund lending activity to the real estate and consumer lending, the total aggregate lending data looks healthy as a cyclical recovery in corporate borrowing drives the aggregate data higher (see left-hand chart below).

But what are companies doing with this extra borrowing? They certainly don't seem to be spending it on investment, which has been plunging


And therein lies the rub: neither organic cash flow, nor incremental net debt issuance (not gross, as the balance merely goes to roll over maturing debt and to refinance the capital structure into a cheaper cost of debt) is being used for "investment, which has been plunging." It is instead being used to fill the void created by Bernanke's ZIRP, now that equities have to be the new debt and provide the return to investors once obtained from fixed income.

So while we have beaten this particular dead horse to death many times, here it is straight from another horse's mouth, how in not so many words, Ben Bernanke's policies are actively destroying America's Corporate capital base, and are setting the stage for an epic collapse in Return on Assets, if not so much Return on Equities in the CapEx-free years to come:

So on this data the corporate sector is borrowing heavily, both in the markets and from the banking sector, to suck up their own stock at a 4% annual rate, albeit not as heavily as in 2007 or 1987. So to that extent, Helicopter Ben's approach of printing money to drive asset prices up actually seems to be working! Newly printed money is clearly finding its way into the hands of willing corporate buyers of equity via the banking sector"(snip)