'..there are enormous numbers of uneconomic and negative cash-flow enterprises that face Rude Awakenings. As the New York Times put it, "General Electric may be the Canary in the Credit Market's Coal Mine." ''What ever happened to "Six Sigma"? GE was one of the most beloved and hyped S&P500 stocks during the late-nineties Bubble Era. With "visionary" Jack Welch at the helm, GE was being transformed into a New Age industrial powerhouse - epitomizing the greater revolution of the U.S. economy into a technology and services juggernaut.
GE evolved into a major financial services conglomerate, riding the multi-decade wave of easy high-powered contemporary finance and central bank backstops. GE Capital assets came to surpass $630 billion, providing the majority of GE earnings. Wall Street was ecstatic - and loath to question anything. GE certainly had few rivals when it came to robust and reliable earnings growth. Street analysts could easily model quarterly EPS (earnings per share) growth, and GE would predictably beat estimates - like clockwork. Bull markets create genius.
It's only fitting. With a multi-decade Credit Bubble having passed a momentous inflection point, there is now mounting concern for GE's future. Welch's successor, Jeffrey Immelt, announced in 2015 that GE would largely divest GE Capital assets. These kinds of things rarely work well in reverse. Easy "money" spurs rapid expansions (and regrettable acquisitions), while liquidation phases invariably unfold in much less hospitable backdrops. Immelt's reputation lies in tatters, and GE today struggles to generate positive earnings and cash-flow.
When markets are booming and cheap Credit remains readily available, Wall Street is content to overlook operating cash flow and balance sheet/capital structure issues. Heck, a ton of money is made lending to, brokering loans for and providing investment banking services to big borrowers. That has been the case for the better part of the past decade (or three). No longer, it appears, as rather suddenly balance sheets and debt matter.
..
Markets this week appeared to begin discounting a troubling scenario in corporate Credit. I believe we are also beginning to witness a historic inflection point with respect to economic structure. If a major tightening in financial conditions and corporate Credit Availability are now unfolding, then there are enormous numbers of uneconomic and negative cash-flow enterprises that face Rude Awakenings. As the New York Times put it, "General Electric may be the Canary in the Credit Market's Coal Mine." '
- Doug Noland,
Canary in the Credit Market's Coal Mine, November 17, 2018
Context'..the inanity of monetary policy today..'November 19, 2018 - European Banks Are Taking Lending Risks Like It's 2007, ECB Says'..The Quest for Sound Money and Good Government..' - '..the Fed's total incompetence in understanding inflation..'