Corporate Welfare in a NIRP World

     In saner times,  investment grade corporate bonds would carry a double digit coupon during the kind of unabashedly reckless deficit spending we're getting from the Administration blemishing Washington these days.  It made financial leverage expensive, at best.

     Then this thing called Zero Interest Rate Policy (ZIRP) came along, or, as we like to think of it here, Corporate Welfare.  ZIRP made financial leverage crazy.  No longer was it enough to sprinkle a blend of debt onto your balance sheet and juice up the bottom line, now corporate borrowings became kind of monetized, cost of capital calculations compelling suits to retire company stock with it.

     Math disadvantaged investors wondered why boards didn't use debt to grow revenues through capital investment, but the numbers screamed otherwise, plus "build it and they will come" was no longer viable in the ZIRP free money outsourced job economy anyway.

     And now one finds Negative Interest Rate Policy (NIRP) sitting on the doorstep.

     News about Exxon Mobil Corp's recent $12 billion bond issue hit us while we were pondering a possible future under that alternative universe.   Hit us like a ton of bricks, so maybe we figured out just what our Looney Tunes Fed is threatening America with.  NIRP is the one where you have to pay your bank a little something on the savings account every month instead of them paying you.  More than one country already has it and in Japan the central bank is buying common stocks for itself too, presumably for the day when banks have all our money and can just go ahead and retire on it.

     Way back when, interest rates on that Exxon Mobil issue would be, say, 10% to 15% .  On $12 billion that would come to $1.2 to $1.8 billion a year.  For simplicity's sake, lets call it $1.5 billion.  Over 20 years, a common maturity in those days, total interest would amount to $30 billion (without bothering ourselves with the present value thing as in the Looney Tunes Universe numbers don't seem to mean squat anyway).

     You see, in the Looney Tunes Universe of NIRP, the corporation pays nothing.  NOTHING.  N...O...T...H...I...N...G.  It's a free stuff for the freaking suits world.

     Meaning income investors get taken to the cleaners once again while the growth crowd has another gravy train to catch, albeit on those flagitious roller coaster tracks crime families install to victimize their prey with terrifying cons.

     Corporate Welfare in the Looney Tunes Universe certainly means that enlightened managers running our investments will continue to go out and borrow every last cent they can wrap their greedy little fingers around and in all probability actually accelerate those stock buyback programs.  There was a fine line between debt and equity in the sanest of times, and CFO's were always coming up with blends - like convertible preferred stock, for example.  In the zaniest of times, as we see it anyway, the Looney Tunes Fed will be granting companies a kind of perverse equity through NIRP. Bad equity, controlled by them as opposed to good equity owned by us.  Whatever, the cash that managers won't be using to pay interest on the debt that they'll still be issuing, though now with negative interest coupons attached, that is, interest bondholders will now pay them for the privilege of holding those bonds, will go straight into retiring shares.  Huge amounts of shares.

     Under ZIRP, which has gone on for the past 8 years or so, we're partway there already.