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MACRO VIEW COLUMNS: Bubbles May Lurk Amid Fed-Fueled Corporate Behavior: Macro Man

(Bloomberg) — There’s an old song from a century ago called “I’m Forever Blowing Bubbles” that’s been kept alive by supporters of West Ham United, an English soccer team. Cynics might suggest that global central banks have also adopted it as their theme song given the lofty valuation of many asset markets. Unsurprisingly monetary authorities have played down this notion, with both the Fed and ECB suggesting that commercial real estate is the only real source of concern at the moment. Yet bubbles can take many forms, and it’s possible that central bank policies are contributing to a bubble in corporate behavior — one that’s contributing to the low level of nominal GDP growth.

  • Central banks are famously averse to identifying bubbles in real time, preferring to conduct postmortems as they pick up the pieces afterward. On the face of it, U.S. equities may seem to have bubble-like valuations — though in the context of interest rate levels, prices are a bit less troubling
  • Yet low interest rate levels have not merely boosted stock prices, they have underwritten a mode of corporate behavior that is not conducive to nominal and real GDP growth — at least in the U.S. Greased by the lubricant of low interest rates, these days American corporations often find it easier to engage in financial engineering than investment in organic growth to boost their earnings per share
  • Returning capital to shareholders has taken on a paramount importance, aided and abetted by easy policy settings. Comparing the S&P 500 dividend yield with net-of-tax corporate borrowing rates suggests that over the last couple of years it has never been as attractive to borrow to pay shareholders, using data since 1990
  • Why does this matter? Over the last three decades there has been a pretty strong negative correlation between the attraction of financial engineering and the share of capex in GDP. Investment creates jobs and economic growth — financial engineering rewards shareholders with a low marginal propensity to consume
  • An obvious exception to this phenomenon is of course Amazon, but even there the benefits are hardly unalloyed. The retailing behemoth has been able to invest in winning market share without bothering to turn a profit. While low prices have benefited consumers, they make it hard for the Fed to meet its mandate — and its arguable that it’s been a net benefit, given the distress among other retailers
  • The level of the stock market isn’t necessarily a bubble…but the behavior that’s driven it there might be. That nonfinancial debt is near all-time highs as the capex share of GDP approaches 45- year lows suggests that the “Bubbles” music is playing, even if the Fed and other central banks cannot hear it
  • NOTE: Cameron Crise is a macro strategist who writes for Bloomberg. The observations made are his own and are not intended as investment advice.

To contact the reporter on this story: Cameron Crise in New York at

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