The Delusions Of MAGA And The Return Of Honest Bond Yields, Part 4

<< Read More: Sell The Rips---The Delusions of MAGA, Part 3

<< Read More: The Delusions of MAGA, Part 2

<< Read More: The Delusions of MAGA 

In the wee hours this AM, the yield on the 10-year treasury note hit 2.993%. That's close enough for gubermint work to say that the big 3.00% inflection point has now been tripped. And it means, in turn, that the end days of the Bubble Finance era have well and truly commenced.

In a word, honest bond yields will knock the stuffings out of the mainstream fairy tale that passes for economic and financial reality. And in a 2-3% inflation world, by honest bond yields we mean 3% + on the front-end and 4-5% on the back-end of the yield curve.

Needless to say, that means big trouble for the myth of MAGA. As we demonstrated in part 2, since the Donald's inauguration there has been no acceleration in the main street economy---just the rigor mortis spasms of a stock market that has been endlessly juiced with cheap debt.

But the Trump boomlet in the stock averages has now hit its sell-by date. That's because today's egregiously inflated equity prices are in large part a product of debt-fueled corporate financial engineering---stock buybacks, unearned dividends and massive M&A dealing.

Thus, since the pre-crisis peak in Q3 2007, value added of the nonfinancial corporate sector is up by 34%, but corporate debt securities outstanding have risen by 85%; and the overwhelming share of that massive debt increase was used to fund financial engineering, not productive assets and future earnings growth.

In a world of honest interest rates, of course, this explosion of non-productive debt (i.e. the cash went to Wall Street, not to main street output capacity or productivity) would have chewed into earnings good and hard.

In fact, during the past 10 years, net value added generated by US nonfinancial corporations rose by just $2 trillion (from $6.1 trillion to $8.1 trillion per annum), whereas corporate debt rose by nearly $3 trillion (from $3.3 trillion to $6.1 trillion). So it should have been a losing battles---with interest expense rising far faster than operating profits.

But owing to the Fed's misguided theory that it can make the main street economy bigger and stronger by falsifying interest rates and other financial asset prices, the C-suite financial engineers got a free hall pass. That is, they pleasured Wall Street by pumping massive amounts of borrowed cash back into the casino, but got no black mark on their P&Ls.

(Click on image to enlarge)

No longer. As bond yields march relentlessly higher, corporate earnings are going to be hammered by rising interest expense-even as C-suites and boards get called to account for having borrowed trillions in order to feed financial engineering payments back into the maw of Wall Street.

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