“Fortress balance sheets” were no longer valued, they were considered inefficient while a BBB rating — the last rung before “junk” status — is now seen as more optimal. Bond proceeds were used to buy back shares — particularly in the US — shrinking the first-loss shock absorber. But there were very few shocks. The global economy weathered a few minor blows, but the last truly existential threat — the Global Financial Crisis — was fading in the rear-view mirror.
(May 15): Legendary investor Warren Buffett famously quipped that you only find out who is swimming naked when the tide goes out. Now, in the midst of the global coronavirus shutdown, the tide has gone out. Firms ranging from small family businesses to mega public companies are watching sales and profits plummet. The unprecedented collapse in both supply and demand has exposed a multi-decade trend that favored shareholders and short-term term profits at the expense of long-term business resiliency.
While the Covid-19 outbreak popped up suddenly out of nowhere, the fragility of large firms has been growing for some time. Forty years of falling interest rates has made increasing corporate leverage too irresistible.
