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Monday, May 25, 2020

How debt destroys

Hertz is bankrupt despite owning one of the largest fleets of vehicles in the world:
What one world war, one Great Depression and numerous oil price shocks couldn't do, the coronavirus did in less than three months and late on Friday, auto rental giant Hertz which was founded in 1918 when it set up shop with a dozen Ford Model Ts, quietly filed for Chapter 11 bankruptcy protection struggling under a massive debt load after its business was brought to a grinding halt during the coronavirus pandemic and talks with creditors failed to result in much needed relief.

The company had a total of 568,000 vehicles and 12,400 corporate and franchise locations worldwide at the start of this year.
Last night on the Big Bear's stream, we talked about deflation, and how the debt portion of the money supply is much larger than the cash + bank accounts percentage of it. Printing the latter doesn't help if the former is vanishing at a faster rate.

The Hertz bankruptcy is a good illustration of this. While the corporation still has more than $1 billion in cash, that's only four percent of the total debt it owes. And that's why simply giving it more money to service its debts isn't going to keep it alive for long, as the only thing that will allow it to continue operations is the bankruptcy court agreeing to wipe out a significant percentage of its $24.4 billion in debt.

And that is, as Zerohedge noted, a deflationary bomb, given the size of the company and the price-depressing effects of the liquidation of its vehicular assets. Speaking of those assets, it's interesting to note that Hertz actually listed more assets than debts on its bankruptcy petition, which would seem to indicate that it's not actually bankrupt, but actually suggests that the real total value of its assets are less than recorded.

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102 Comments:

Anonymous Anonymous May 25, 2020 5:32 AM  

The illusion that price equals value. Or perhaps the illusion that price/value relationship is more than transitory and contingent.

Corporate “valuations” based on the last stock purchase are just such illusions as there’s no way you can actually sell every share at that price. Or coming back to Hertz, buying a new car and listing the price as the value on your balance sheet when the money you can get for it dropped up to 25% the moment it was delivered. It’s not like Hertz doesn’t know about vehicle depreciation but with artificially low interest rates and easy lending standards they were able to keep pretending they had a viable business when they were probably bankrupted in 2001 or 2008.

CoronaChan wins again!

Blogger crescent wrench May 25, 2020 5:44 AM  

While this will require creditors to surrender some value of Hertz's debts, chappter 11 is not chapter 7. That said, the airline industry is instructive here: they're likely to end up gobbled by a competitor, resulting in "redundancy elimination" in the various headquarters.

Deflation: it's not just for consumer prices.

Blogger buzzardist May 25, 2020 6:05 AM  

Assets, however they may be valued, are worthless to Hertz if the assets aren't liquid. It could be that Hertz is overestimating the value of its assets. Would that help convince creditors and a bankruptcy judge that the company is worth saving? Maybe.

Hertz obviously has a debt problem, and debt makes the company fragile. The immediate problem that Hertz faces is a cash flow problem. No money is coming in because people aren't travelling, but the debt service and operating costs are fixed.

A company can be profitable on paper, but still fall into bankruptcy. If your current contracts won't pay off until the end of the year, but you need to pay a lot of operating costs that you don't have cash for now, and you're unable to obtain credit until the end of the year, you're bankrupt.

In normal circumstances, Hertz may still have had a chance at being profitable. But with that massive debt, Hertz was fragile. All it took was this shock of people not travelling for a few months, and the lack of cash flow killed the company. Were Hertz not already deeply in debt, creditors may have lined up to give the company loans, betting that the coronavirus shock would pass. With the debt, Hertz has extra operating costs of servicing the debt, plus no new creditors are forthcoming. In six months or a year, if travel returns to normal, could Hertz be profitable again? Possibly. Does Hertz have more assets than it does debt? Maybe. But none of that does Hertz any good now.

Assets that are not liquid do not help with a cash-flow problem. Those assets sometimes even make the problem worse by adding to maintenance costs. Could Hertz sell off assets to pay the debts without filing bankruptcy? Possibly. But then Hertz would not have assets to keep functioning anymore. Bankruptcy is part of the financial game. If Hertz is able to avoid being picked to the bones and sold off piece-by-piece in the bankruptcy process, it is possible that the company could use bankruptcy to buy time and restructure the debts until travel resumes. But that's only buying time.

Debt = fragility. Yes, debt can be used to finance company growth, and debt can tide a company over during a temporary downturn. But debt is always a roll of the dice against unexpected bad events happening. If a company is able to just squeeze by with debt in normal times, it's likely dead after two or three successive shocks.

Blogger nswhorse May 25, 2020 6:34 AM  

How does this kind of situation actually arise? I'm sure the people running Hertz aren't morons. They must know that $24.4 billion debt against $1 billion in cash doesn't add up, and can only end one way. They must know that liquidating their physical assets won't produce anything close to the paper valuations in cash. Even morons know that fire sale = everything gets sold at a hefty discount.

Blogger Avalanche May 25, 2020 7:02 AM  

My ill-educated financial mind, although I am 1/3-the-way through "The Return of the Great Depression," sees: Hertz tries to sell off hundreds of cars, which results in massive price drop in used and new cars, which results in the automakers crashing horribly because few folks can afford a new car even AT corona-chan prices?

And, Hertz lays off thousands of workers all across the U.S. who then depress retail-salesfolk and car-washer/runner wages, whose appearance in the job-market make things tougher for other such folks.

Tipping dominoes? Is this a dreadful game of dominoes, and once they start falling: ashes, ashes, we all fall down?

Blogger SciVo May 25, 2020 7:06 AM  

@nswhorse:

How does this kind of situation actually arise? I'm sure the people running Hertz aren't morons.

Taleb's IYI (intellectual-yet-idiot) + the principal-agent problem. As Upton Sinclair said, "It is diffficult to get a man to understand something when his salary depends upon his not understanding it."

Blogger rikjames.313 May 25, 2020 7:20 AM  

Because of the way goods, particularly tooling and autos, are 'depreciated' in the US those items are almost always carried on the books at an inflated value.

There are exceptions for certain situations, like some economically impacted areas and, famously, Indian Country. Hertz must not have purchased an accelerated depreciation special law for itself from Congress

Blogger Skyler the Weird May 25, 2020 7:43 AM  

America Air is probably next.

Blogger YehudaL May 25, 2020 8:08 AM  

Something that is beyond me, you write that debt is vanishing at a faster rate than cash can be printed. Is that a typo? Either way I'm ordering RGD in the Hope of grasping slightly where all the "experts" are spouting nonsense to nodding masses.
Thanks

Blogger Brett baker May 25, 2020 8:10 AM  

Tax laws. You can "lose" a lot of money, but still be a well run company.
Until the Black Swan shows up.

Blogger Owen Martin May 25, 2020 8:14 AM  

Deflation is a good thing, it is a correction of false accounting, that is, false asset values. Deflation is as necessary as breathing out. The Ecb spends most of its time fighting deflation. The Germans are finally fighting back.

Blogger Canadian Warlord May 25, 2020 8:16 AM  

Regarding Hertz's assets versus debt:

Selling cars and renting cars is the same business right now. People are not driving, they have nowhere to go. So those cars would have to be re-evaluated at lower prices, if they can move at all.

In college I worked for two outfits, Budget and Tilden (just after it merged with National). The industry as a whole is a nickel and dime one. I remember our Tilden losing money on Chevy Corsicas because the things could not make 40,000 km without something breaking. At Budget I ran a location sometimes alone, an unprofitable one that didn't last in a very vibrant area. Each car that wasn't rented costed the company at the time I think, $25 per day. Worked there ten weeks, we always had a few cars, I think I rented out about two dozen. Mostly moving vans. A co worker raided the company safe, I wasn't told the new security code, and cops showed up with guns drawn. Hilarious industry.

Blogger Azure Amaranthine May 25, 2020 8:30 AM  

Just wiping out debts is deflationary.

"How does this kind of situation actually arise? I'm sure the people running Hertz aren't morons. They must know that $24.4 billion debt against $1 billion in cash doesn't add up, and can only end one way."

It doesn't matter, so long as the company floats on stock. All that matters to most of them is the output. The corporate entity can take all the red and dissolve like a soap bubble into nothing, all the employees and investors care about is what can be recorded as black and directed to them.

To make it a bit more obvious, a lot of times debt happens in order to frontload "investment" purchases that are expected to pay off more on the back end than the debt payments plus interest. Load the company up with business majors and they'll gladly go ten miles into the hole for a nifty kickback for today's upper management who expect to retire long before the game is up, and think nothing of intentionally destroying the company in the process.

It's a lot like when the IMF lends to turd world hellholes knowing full well they can never pay it all back... it doesn't matter, the money's fake anyway, but the resource extraction flowing to the banksters isn't.

Blogger Paulito May 25, 2020 8:33 AM  

@5 Avalanche:

It's actually worse for Hertz than that, because over the past two months, there's already been a massive drop in used car prices. It's the worst time ever to try dumping used cars. I doubt they'll move the line much, but that's only because it's already so low.

Blogger Damelon Brinn May 25, 2020 8:36 AM  

How does this kind of situation actually arise?

Yeah, I always wonder how, when you're already $23B in debt, you convince someone to give you the 24th billion. I suppose you have a couple of your pet congressmen call their cousin the banker and tell him how important your company is to their constituents.

Plus, the lenders know there's a good chance the company will be deemed too-big-to-fail, and they'll be bailed out anyway.

Blogger VD May 25, 2020 8:40 AM  

you write that debt is vanishing at a faster rate than cash can be printed. Is that a typo?

FFS, no. This really isn't that hard. What sort of "typo" could even account for an alternative statement?

Blogger Damelon Brinn May 25, 2020 8:43 AM  

you write that debt is vanishing at a faster rate than cash can be printed.

No matter how much money you print, you can't make people spend and circulate it and multiply it by borrowing against it. If people take the extra cash and pay off debts, that only wipes out more debt.

Blogger Crew May 25, 2020 9:02 AM  

I don't know whether to thank Fauci of damn him!

Perhaps he should be thanked because he has allowed Trump to move on so many fronts ...

https://www.breitbart.com/economy/2020/05/23/wall-street-journal-trump-will-shrink-opt-foreign-worker-program/

https://www.theepochtimes.com/trump-executive-order-aims-to-boost-economy-by-reining-in-regulatory-abuse_3363133.html

Blogger God Emperor Memes May 25, 2020 9:05 AM  

Cool, I need a new truck.

Blogger Crew May 25, 2020 9:07 AM  

Hertz tries to sell off hundreds of cars, which results in massive price drop in used and new cars, which results in the automakers crashing horribly because few folks can afford a new car even AT corona-chan prices?

I suspect that most people are getting almost daily emails from car dealerships trying to get them to buy a new car.

I know I am.

Blogger pyrrhus May 25, 2020 9:08 AM  

I would guess that Hertz's assets would currently bring less than 50% of book value after considering the costs of administering and selling them....So creditors will probably go along with the reorganization plan.... If they were smart, they would take the money and run, as this industry is coming back any time soon.

Blogger Grandpa Lampshade May 25, 2020 9:23 AM  

I don't know how many times I've tried to explain how this works (thanks Vox) only to have people keep repeating back, "That's a whole lot of money they're printing" as though the fed literally turns on a printing press and like magic it's floating around the economy. Marketing phrases are very powerful. "Turning on the printing presses" just like "keep us safe" and "flatten the curve" has been repeated so any times to the public that they accept it without question.

Blogger An Orthodox Christian May 25, 2020 10:12 AM  

Vox posted this link a while ago: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

It contains the answer to your question.

Blogger JovianStorm May 25, 2020 10:13 AM  

Capitalism: I am the best system ever.

USA:Let's half ass capitalism by using crony capitalism in favor of predatory bank loans

Crony Capitalism: I cAn MakE U rich

Crony Capitalism after just 1 month of no income : O nO I aM deAd

USA: *surprised face *

Blogger Freeholder May 25, 2020 10:30 AM  

Vox,

How blatant do you think the printing presses are going to be? Are student loans actually going to be wiped off? Are mortgages going to be deemed void? What other programs do you think they are going to come up with?

Blogger Ominous Cowherd May 25, 2020 10:34 AM  

Damelon Brinn wrote:No matter how much money you print, you can't make people spend and circulate it and multiply it by borrowing against it. If people take the extra cash and pay off debts, that only wipes out more debt.
You can't make people spend it, but, there is another actor in the economy.

This bankruptcy will take $24(10^9) out of the money supply. Uncle Sugar just borrowed into existence $3(10^12), and more to come. Government is the borrower and spender of last resort, and since loaning to the government is the way the central bank keeps its license to counterfeit, it will lend to the government without limit.

The government has no intention of ever repaying anything. The central bank doesn't care, because repaying those ledger entries is totally meaningless to them. The government buys power, the central bank gets to strip the nation's assets. Everyone who makes decisions is happy. Nobody cares about the peasantry.

Blogger NewTunesForOldLogos May 25, 2020 10:40 AM  

Let’s take Bob as an example. Bob has 10,000 in credit debt, and 350,000 in mortgage debt. Bob gets his coronabucks, decides it’s a drop in the bucket against his credit cards, buys a new cell phone and a couple dinners out. Bob’s employer goes under, and he files bankruptcy. He loses his house, and the bank sells it for $250,000.

$1200 printed, $110,000 destroyed. Net money creation, -$108,800.

They’d have to run another 90 checks at $1200 to make up the shortfall, but Bob isn’t the only one drowning in mortgage and credit card debt. In fact, the AVERAGE credit card debt in the US is around $6K, and average mortgage debt is much higher.

Every corporation that goes bankrupt destroys billions in debt.

Blogger Ominous Cowherd May 25, 2020 10:45 AM  

Grandpa Lampshade wrote:... as though the fed literally turns on a printing press and like magic it's floating around the economy.
The Fed literally makes a ledger entry, and like magic, the government has another trillion to spend, and the government does spend it. Like magic, it's floating around the economy.

In recent decades most of that magically added cash has gone to bidding up asset prices, and we have seen bond and stock prices rise, giving an illusion of prosperity. The ordinary stuff of plain living hasn't been bid up much. This year it's different.

The local ATV store just sold about 200 four-wheelers and side-by-sides last month. That's a HUGE increase from a normal spring, they tell me. Maybe 3(10^9) of that 3(10^12) the government borrowed went to normal people, and around here they have been buying toys like mad. Probably the details are different where you are, but everywhere ordinary people are buying two or three billion worth of ordinary stuff. Even with debt repayment as an option, that's going to push the price of ordinary stuff up a bit. Grocery and ATV prices are likely to rise a bit.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 11:00 AM  

4. nswhorse May 25, 2020 6:34 AM
How does this kind of situation actually arise?


the executive suite and BoD tend to be compensated off of stock price performance, often going so far as to receive much of their compensation IN company stock.

as such, they have a vested interest in engaging in short term tactics to juice the stock price, even if the result of those tactics is strategic positions which are extremely dangerous to the company.

and they are practically never "punished" for putting the company in a bad strategic position.

ie - getting shoved out the door with hundreds of thousands of dollars ( or more ) in a golden parachute is not much of a deterrent to someone who wants to break laws or commit fraud in order to get ahead.

Blogger Reprehensible Adam May 25, 2020 11:01 AM  

Makes me wonder if Hertz saw this coming in Canada when they changed its name to Herc in 2019.

Blogger Snidely Whiplash May 25, 2020 11:03 AM  

Speaking of those assets, it's interesting to note that Hertz actually listed more assets than debts on its bankruptcy petition, which would seem to indicate that it's not actually bankrupt, but actually suggests that the real total value of its assets are less than recorded.
The attempt to liquidate Hertz's stock is driving prices of used cars, and hence the value of company assets, into the ditch.
Last month they sold off their least profitable, highest value cars, a few dozen Chevy Corvettes, resulting in an immediate drop of over 10% in the price of used Corvettes nationwide. Now imagine 20,000 Nissan Versas hitting the market.
An awful lot of corporate balance sheets will be hit by declining car values, and the impact will be felt by the new car market as well. Most new car sales are in competition with newish used cars, and the bigger the price differential, the harder it is to justify the large added expense of a slightly newer car.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 11:09 AM  

weirdly, RV sales are supposed to be up this year.

https://fox4kc.com/news/kc-comeback/heres-why-rv-sales-are-skyrocketing-during-the-pandemic/

Blogger Unknown May 25, 2020 11:14 AM  

There are laws and accounting rules dictating how corporations can depreciate assets. For tax purposes, there are hard limits on how a business can depreciate autos, there is an allowance for first year, 2nd year, and on down the line. The accounting side of it is much more lenient than the tax side, but there is no way Hertz will be able to dump tens of thousands of used vehicles on the market and get anywhere near book value. On the plus side, Hertz will be able to carry forward a lot of depreciation expense to future tax years, because what they will sell their cars for will not be anywhere near what their basis per vehicle is.

Blogger eclecticmn May 25, 2020 11:22 AM  

@27. NewTunesForOldLogosMay 25, 2020 10:40 AM
Let’s take Bob as an example....


Thanks. I need simple examples but I still have trouble understanding this stuff. Is anyone better off after this debt gets destroyed?

Blogger Kingly Gift May 25, 2020 11:28 AM  

Debt jubilee one chapter 11 at a time.

Blogger Linda Fox May 25, 2020 11:46 AM  

Let 'em fail. Don't bail out overloaded debt machines. Bankruptcy, sell the assets (might want to refine the bankruptcy laws to prevent multinational/foreign companies from bidding on the goodies), and let the market take over.

Blogger ZhukovG May 25, 2020 12:00 PM  

@NewTunesForOldLogos: If I recall correctly, if Bob files Chapter 13, he keeps his house and most of his debt is wiped out. This of course requires Bob to be able to make payments on the debt portion the court allows to stand.

If the creditors take a 75% loss, then that's a loss of $268,000 dollars after $1200 in Corona-bucks.

Blogger Damelon Brinn May 25, 2020 12:01 PM  

Is anyone better off after this debt gets destroyed?

The guy who has been avoiding debt and saving his money, so he can buy Bob's house at a discount.

Blogger kurt9 May 25, 2020 12:05 PM  

Why did all of these corporations take on so much debt in the first place? Did they need it for market growth? Or is this phenomenon nothing more than the pernicious effect of senior management being comprised of mostly finance people?

Blogger "William Berke" May 25, 2020 12:07 PM  

Money changers who hold with conviction that debt is liquidity sure are plentiful these days and they seem to be in favor of the American government holding their bag of gutted equities.

Blogger Skyler the Weird May 25, 2020 12:13 PM  

**RV sales are supposed to be up this year.**
BugOut Buggys

Blogger SciVo May 25, 2020 12:13 PM  

@ Snidely Whiplash:

Most new car sales are in competition with newish used cars, and the bigger the price differential, the harder it is to justify the large added expense of a slightly newer car.

Can confirm. I was planning on buying a new compact SUV on my next day off, and now if prices crater for slightly used cars, I'll have to reconsider them.

Blogger maniacprovost May 25, 2020 12:16 PM  

So we have 3 consensus opinions around here:

1) the United States is a house of crony capitalists cards.
2) deflationary forces have been growing.
3) debts that can't be paid back won't be.

The logical conclusion is that their absolutely will not be a debt jubilee for student loan forgiveness. no one in charge cares if student loans are ever repaid or not, or if mortgages are ever repaid or not. They only care about keeping those values on the balance sheets.

I would expect, at most, something along the lines of interest-only payments at very low rates becoming the new norm. Keep kicking the can until the college students die of old age.

Blogger RC May 25, 2020 12:21 PM  

The dominoes fall, each corporate bankruptcy weakening its stiffed suppliers, eliminating some debts and stretching payments for others. Our country is loaded with fragile firms highly dependent upon increasingly questionable supply lines of both products and financial backing, leaving huge swaths of our economy vulnerable to a single Black Swan, likely manufactured from whole cloth.

It's going to be a mess to navigate, but the outcome could be positive for American Posterity. The sooner we return to reality, the better.

Blogger SciVo May 25, 2020 12:24 PM  

@eclecticmn:

Is anyone better off after this debt gets destroyed?

Yes, everyone is better off that is not part of the vampire squid. Unless you're directly benefiting from systemic usury, it's just a leech on you and your neighbors, driving up prices for everything from durable goods to luxury bads (e.g. college degrees).

Blogger KPKinSunnyPhiladelphia May 25, 2020 12:55 PM  

Buzzardist, outstanding post.

You can ride the debt gravy train as long as the cash is coming in to service it.

I hate to break it to everyone on here who loves the GE, as I do -- he made his fortune the same way, as most real estate moguls who survive do.

Borrow as much as you can, own the assets, depreciate them and take huge tax breaks, have enough cash flow that can satisfy the lenders need for debt service, have a some cash left over for you and yours, then turn around and sell the assets when they are past their "useful" life, or in the case or real estate, refinance, and start the whole cycle all over again, with enough cash to repay the tax obligations using, one hopes, depreciated currency.

It's financial musical chairs. At some point, inevitably, somebody is not going to have a seat.

Blogger YehudaL May 25, 2020 12:58 PM  

Sorry for the stupid question and thanks for the explanations guys.

Blogger SciVo May 25, 2020 1:20 PM  

@maniacprovost:

The logical conclusion is that their absolutely will not be a debt jubilee for student loan forgiveness. no one in charge cares if student loans are ever repaid or not, or if mortgages are ever repaid or not. They only care about keeping those values on the balance sheets.

That's as good of an explanation as any for Elizabeth Warren's fall from grace with the Establishment (which does not give a tinker's damn about her lies). Essentially, Puppet Joe's candidacy is the vampire squid's "bargaining" stage of grief over student loans.

Blogger Ingot9455 May 25, 2020 1:53 PM  

Just to add to the fun, remember that Hertz bought Dollar/Thrifty back in 2012-3 for 2.3 billion dollar - about 10% of their current debt woes.

Hertz is generally a midrange car rental company where they buy fleet cars at a discount en masse from car companies. It used to be that they would 'sell' them to Hertz auction sales at around 25k miles, before any beginning standard maintenance would set in. You pay a little more for the fresh new car and the membership goodies like walk-up-and-get-in-a-car online checkin and checkout.

Dollar-Thrifty on the other hand, take slightly older cars, focus on maintaining them cheaply, upselling to customers, less customer service and longer lines so that they can win on initial price. Their cars go from 25k miles to 60k miles - they do standard maintenance but hope to pass on the cars before serious maintenance starts.

As stated, there are tax benefits and depreciation benefits that they carefully manage in doing it this way.

The idea of buying the Dollar/Thrifty brands is that they would now take their 25k miles fleet cars and keep them in house, rotating them to the Dollar/Thrifty lowrange brand. They'd cut out one of their sell-back tax-benefit depreciation points.

Looks like it didn't work out in the long run.

Blogger Azure Amaranthine May 25, 2020 2:00 PM  

"no one in charge cares if student loans are ever repaid or not, or if mortgages are ever repaid or not."

Only they do. You have to remember that even though banksters and such look like a united front to us, they're really a bunch of competing factions and mini-factions. If faction A overloads some or all of its vassals with debt to the point where they permanently stop paying because they can't, factions B, C, D, and so on would like nothing more than to snap up those vassals with a new wad of fiat bait. So, the not-A factions rig the legal system so that overloaded vassals are expiated and freed up temporarily -- just long enough to bite on the next hook.

Interestingly, faction A might not even care much. It'd be like beating a dead horse. Gotta rotate the soylent green on the arable land every few years so it keeps producing. Who knows, faction A might even be the one to set the hook again once the vassals get the scent of hope and regain the will to continue.

If the vassals aren't let loose from time to time, they tend to die of ill health, commit suicide, or go postal whether or not they can identify the real source of their misery. Men's cages have to be carefully occulted.

"I hate to break it"

(Doubt.)

Blogger Zeroh Tollrants May 25, 2020 2:12 PM  

That's actually one of the least weird things to go up IMO.
People are taking cross country camping vacations as well as those quitting their jobs (,or losing them now), and taking a trip to all of the lower 48.
I even know 2 families personally who did this, and you can find these kind of folks all over the socials.
The number of Millennial hippies living in buses and
RVs are almost at a sustainable
meme level.

Blogger Akulkis May 25, 2020 2:44 PM  

"Hertz obviously has a debt problem"

Not nearly as much of a problem as the bank that made the loans to Hertz.

---

If you owe your bank $100 000, you've got a problem
If you owe your bank $25 000 000 000, the bank has a problem.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 3:20 PM  

51. Zeroh Tollrants May 25, 2020 2:12 PM
That's actually one of the least weird things to go up IMO.


historically, RVs tank in an economic downturn.

also, RVs tend to tank on a fairly regular cyclical basis, usually every 5 years or so. RVs have been in a bull market ever since 2010 ...

also also, the RV factories have been shut down:
https://www.elkharttruth.com/elkhart_county/thor-winnebago-shut-down-production/article_ab71f30d-7099-573f-8bae-c5a7347a8332.html

now, it's true that most RV dealers keep a huge amount of inventory on hand. even so, that can't last forever.

fortunately, like vape shops, liquor stores and car washes, Holcomb has decided that RV manufacturers are an "essential industry".

i'm starting to think this whole pandemic thing is fake.

https://www.elkharttruth.com/hometown/rv-industry-deemed-essential-rvia-says/article_c1d254b3-374a-52d3-9830-a193f31906dd.html

lower fuel prices and people abandoning normal homes to live in RVs ... how far can this take you?

because i tell you what, RVs aren't insulation rated for the -40F temps they see in the Vernal UT, Dakota and Wyoming oil fields.

Blogger Nihil Dicit May 25, 2020 3:22 PM  

What one world war, one Great Depression and numerous oil price shocks couldn't do, the coronavirus did in less than three months

Until quite recently in historical terms, no one would take on such astronomical levels of debt and no one would loan it to you. This time it is different, but only in a far, far worse way.

Blogger Anthony May 25, 2020 3:26 PM  

$24 billion in debt needs about $1.2 billion/year to pay the interest. If your company makes $2 billion/year in profit, you're sitting pretty. If your company makes $1.5 billion in profit, it's a squeeze, but you still have a viable business.

Until the day that 50% of your business goes away and you'll be lucky to have $0.6 billion to pay $1.2 billion in interest.

Blogger sammibandit May 25, 2020 3:27 PM  

Hearing you explain the M1, M2, M3 equation yesterday effectively taught me. Thanks for that. It finally clicked.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 3:39 PM  

49. Ingot9455 May 25, 2020 1:53 PM
Looks like it didn't work out in the long run.



how could it? even a zero debt company would have issues with their sales being arbitrarily flat lined for 3 months or more.


17. Damelon Brinn May 25, 2020 8:43 AM
No matter how much money you print, you can't make people spend and circulate it and multiply it by borrowing against it.


what is the upper bound on .Fed spending? especially in a milieu in which every nation on the planet is engaged in "payroll protection" type schemes?

because G is just as significant of a GDP component as I or C or X.

as i pointed out several years ago, the GDP number is an entirely political number given that there is no constraint on G, especially on debt funded G.

i would just like to note that if you're going to do a $3 Trillion aid bill
...
shouldn't you just be incrementing every citizen in a nation of 300 million a $10,000 check?

Blogger By My Greybeard! May 25, 2020 4:09 PM  

Ominous,
isn't the effect of "not caring about the peasantry" analogous in result to "eating your seed corn"?

Eventually you run out of peasants/healthy peasants and/or slaves, smiling idiots, etc that will abide the systemic rape under such a power structure?

If the situation becomes intolerable or they become desperate, they'll stop participating and might even revolt.

If they grow too "thin", discouraged, and sickly b/c the flaying takes too much flesh when skinning the peasantry of the Fruits of Their Labor, there'll be a revolt and the rapidts will dangle.

I just can't wrap my mind around the thoughts displayed by these ppl's actions.

Blogger Glen Sprigg May 25, 2020 4:28 PM  

Canada's shelling out large amounts of Corona-bucks; my wife and I have paid off over $12,000 in credit card debt in the past two months, something that would have been unthinkable only three months ago.

We decided that we'd play the game, but play it by our own rules; we've got a long way to go to get out of debt, but we'll get there.

Corona-Chan: It's good for what ails you!

Blogger weka May 25, 2020 4:47 PM  

The upper bound on helicopter money is when it does not work. Which is now. People are getting rid of credit card debt. Mortgage rates are the lowest ever in NZ -- below 3%. The government is paying furloughed workers for 20weeks hoping the jobs will return and this is a v shaped recession.

But the 100 year plus department store in my town which services the runholders (sheep farms) is closing stores and retreating to its small town base, hotels are closing, and firms are shutting.

Deflation is the best option now. No one is spending for no one has spare cash. Revalue the cash remaining.

Blogger God Emperor Memes May 25, 2020 5:30 PM  

Yeah, but your petrol is still, like, $2/litre and house prices haven't decreased.

Blogger Damelon Brinn May 25, 2020 5:47 PM  

shouldn't you just be incrementing every citizen in a nation of 300 million a $10,000 check?

That surely has a better chance of working than handing it to the banks, especially if you give it to people with high time preferences. Black People Twitter loved Trump for one day when they got their checks, and it wasn't because they were excited to pay off credit cards. Many big-screen TVs and Nikes were purchased that day.

But even that only gets it spent once. If the businesses they spend it at turn around and pay off debt, it's gone again. To maintain inflation in a debt-based currency (as I understand it), you have to get someone to borrow.

Blogger Ominous Cowherd May 25, 2020 5:47 PM  

By My Greybeard! wrote:Ominous,
isn't the effect of "not caring about the peasantry" analogous in result to "eating your seed corn"?

I think so, eventually. But so far so good, and arrogant rulers say ``apres moi, le deluge.''
weka wrote:The upper bound on helicopter money is when it does not work. Which is now. People are getting rid of credit card debt.
It's still working. The peasants are still eating, still getting shorn, and that's what it's all about. Sounds as if NZ is replacing private debt with government debt. As long as the peasants borrow, borrow, borrow when it's over, all returns to normal. This could wind up as a kind of disguised jubilee?

When the helicopter money stops working is when everyone stops taking the money. Once folks lose confidence in it, nobody wants any of it, and the value goes to zero as the quantity goes to infinity. That's hyperinflation.

Blogger Dan in Georgia May 25, 2020 5:57 PM  

Hertz's assets suddenly dropped in value, and the loans were based on what they *WERE* worth. Deflation is a harsh mistress.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 6:22 PM  

60. weka May 25, 2020 4:47 PM
The upper bound on helicopter money is when it does not work.



exactly.

and, given the nature of politicians, bureaucrats and governments, you know that they're not going to stop spending until they find that limit.

Blogger Jack Amok May 25, 2020 7:03 PM  

Not to make it another Boomer thread, but two things have "Boomers" as part of the answer.

Yeah, I always wonder how, when you're already $23B in debt, you convince someone to give you the 24th billion.

Depends on how desperate the "investors" are to find a place for their money. If you need to earn your 10% compound interest on your investment trust to keep your clients happy, and all the safe investments have already been made, you might just have to shovel another billion into an already over-leveraged business. It's either give it to Hertz and hope they make it through, or miss your growth targets and have your clients cash out.

Boomers are (or were, until Corona-Chan came along) making in general the highest salaries of their lives. They're fast approaching retirement, and are dimly aware they haven't saved enough, so they are shoveling as much into their retirement funds as they can. That money has to go somewhere. Hertz was available.

One of the things that will contribute to deflation is the Boomers (and their Euro-68-er counterparts) retiring in ever-growing numbers and switching from contributing to retirement funds, to drawing from them. The pressure to find someplace to invest all that money will decrease, loans will become much harder to get, and cash-on-hand will become more valuable.


also, RVs tend to tank on a fairly regular cyclical basis, usually every 5 years or so. RVs have been in a bull market ever since 2010 ...

Boomers again. 2010 is about when they started retiring. Buying an RV (and towing the manly Harley behind it) is oh, so very Boomer.

Blogger Akulkis May 25, 2020 8:05 PM  

"weirdly, RV sales are supposed to be up this year."

Not weird at all. Why stay in a possibly contaminated hotel room when you can travel in your own private hotel room on wheels, with a refrigerator and small stove to boot.

Blogger Akulkis May 25, 2020 8:07 PM  

This comment has been removed by the author.

Blogger Akulkis May 25, 2020 8:09 PM  

"Is anyone better off after this debt gets destroyed?"

People with cash and low or no debt.

Blogger Akulkis May 25, 2020 8:11 PM  

"Why did all of these corporations take on so much debt in the first place? Did they need it for market growth? Or is this phenomenon nothing more than the pernicious effect of senior management being comprised of mostly finance people?"

Because the MBA schools are teaching that the most important numbers are the balance sheet 90 days out... to hell with long-term stability of the company. This is reinforced by the contracts that C*O executives get (where * = E, F, I, etc.)

Blogger Akulkis May 25, 2020 8:17 PM  

Re: real estate moguls
"Borrow as much as you can, own the assets, depreciate them and take huge tax breaks, have enough cash flow that can satisfy the lenders need for debt service, have a some cash left over for you and yours, then turn around and sell the assets when they are past their "useful" life, or in the case or real estate, refinance, and start the whole cycle all over again, with enough cash to repay the tax obligations using, one hopes, depreciated currency."

There's a saying in the hospitality industry: A hotel doesn't start making a profit until the 5th owner.

(The first 4 owners all over-paid for it... unless the owner is also the builder).

Blogger Akulkis May 25, 2020 8:22 PM  

"The number of Millennial hippies living in buses and
RVs are almost at a sustainable
meme level."

Because they have been priced out of real estate. The real estate bubble was reinflated within 24 months after the 2008 debacle, and was still being inflated right up until the lock-downs started.

Blogger VFM #7634 May 25, 2020 8:22 PM  

One of the things that will contribute to deflation is the Boomers (and their Euro-68-er counterparts) retiring in ever-growing numbers and switching from contributing to retirement funds, to drawing from them. The pressure to find someplace to invest all that money will decrease, loans will become much harder to get, and cash-on-hand will become more valuable.

Another thing I've wondered about is the inevitable increase in deaths coming due to Boomers dying. What will happen to their wealth? They can't spend it after they're dead, after all. Sometimes I think Boomer deaths will actually unclog the economy since they have to leave the wealth to somebody, such as their kids, and it'll serve as a low-running stimulus for years on end. But it could also contribute to deflation somehow... I'm not an expert on finance.

Blogger RedJack May 25, 2020 8:51 PM  

I will defer to vox, but this is how it was explained to me. Being profitable and having cash in the bank makes you a take over target at best, and will get you looted by the Board of Directors.

Saw it happen where a company took out debt just to avoid getting the money looted

Blogger Snidely Whiplash May 25, 2020 8:54 PM  

VFM #7634 wrote:What will happen to their wealth? They can't spend it after they're dead, after all. Sometimes I think Boomer deaths will actually unclog the economy since they have to leave the wealth to somebody, such as their kids, and it'll serve as a low-running stimulus for years on end.
You ever see the bumper sticker that says "I'm spending my children's inheritance"? That is what they are doing. borrow against any assets, like say house or rental properties, to buy themselves Harleys and drugs and sex tours and giant motor homes and cruises and basically one last shot at pretending they're still with it and young enough and attractive enough to get laid.
die with the house in hock, and Medicare there to take any leftover wealth, to pay for that last 3 months of medical care. My wife's friend spent 10 years not working, caring for her sick Boomer parents and walked away with no inheritance and $3000 in legal bills.

Blogger John Best. May 25, 2020 9:03 PM  

Also the grooming gang in Barrow used a drug debt for force a girl into sex work for them. Its interesting how we can see just have evil and perverting debt is at the highest and lowest levels of society.

Blogger nswhorse May 25, 2020 9:15 PM  

And there is no plan to ever repay the principle?

Blogger justaguy May 25, 2020 9:24 PM  

bankruptcy is a great way eliminate debt because it only affects those who choose the corporate debt-- in this case Hertz. The assets remain and are sold off-- so a bunch of companies and people get cheap cars at a deflated value. One more company that tried to play the financial game instead of the product game goes away along with its stockholders and those who involved in their debt. Might not have happened if not for Covid-19, but well Sh-- happens and companies have to plan for it.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 10:02 PM  

68. Akulkis May 25, 2020 8:07 PM
Why stay in a possibly contaminated hotel room when you can travel in your own private hotel room on wheels, with a refrigerator and small stove to boot.



why are people traveling at all when they supposedly can't afford to feed themselves?

certainly, yes, some people can still afford to travel
...
some people can afford to take the year off and sail around the world.


66. Jack Amok May 25, 2020 7:03 PM
Buying an RV (and towing the manly Harley behind it) is oh, so very Boomer.


Harley sales were down 5 consecutive years prior to the quarantine and Corona is slaughtering them. since lockdown Harley is more than 15% off in the Can-Am markets.

https://www.motorcyclesdata.com/2020/05/14/harley-davidson/

of course, a 70 year old probably doesn't want to drop a 600lb motorcycle on his hip. not to mention that it's not a good idea to be rolling down a road at +50mph with poor eyesight and declining mental acuity and to not have a steel cage around you.

whatever the reason, RV and Harley sales are clearly not coupled.

i think Zeroh's idea of Millenials living in their parents driveway is a more logical supposition. it might still be the Boomers buying the RV just so their kids don't have to listen to them use up their supply of Viagra.


74. Snidely Whiplash May 25, 2020 8:54 PM
My wife's friend spent 10 years not working, caring for her sick Boomer parents and walked away with no inheritance and $3000 in legal bills.



all the love our Latchkey parents always showed for us!

Blogger Ransom Smith May 25, 2020 10:03 PM  

The number of Millennial hippies living in buses and
RVs are almost at a sustainable
meme level.

I think that's a West Coast thing, or at least an Urbanite thing.
I know zero Southern millennials who dream of an RV or a tiny house.
Most of us are either still trying to get a house or had to settle with something less desirable.

Blogger kurt9 May 25, 2020 10:22 PM  

I'm starting to think that both the shutdowns and the real estate bubble are both driven by and for the benefit of boomers. I know you guys are not keen on the "Z" man. But he does make some insightful observations. One is that the shutdowns might not have occurred if this corona virus had shown up 20 years ago. We certainly did not shutdown over SARS (although that did not spread asymptomatically). The real estate bubble is clearly driven to usher the boomers into a comfortable retirement.

Blogger kurt9 May 25, 2020 10:26 PM  

"One of the things that will contribute to deflation is the Boomers (and their Euro-68-er counterparts) retiring in ever-growing numbers and switching from contributing to retirement funds, to drawing from them. The pressure to find someplace to invest all that money will decrease, loans will become much harder to get, and cash-on-hand will become more valuable. "

Peter Zeihan has been saying this for some years. He believes the crossover point will occur in '22 or '23.

Blogger Snidely Whiplash May 25, 2020 10:56 PM  

I wonder how many Boomers are just not going to go back to work when the lockdown ends.

Blogger furor kek tonicus ( *autistic screeching* ) May 25, 2020 11:37 PM  

as with Government spending, there has to be an upper bound on demand for Walmart greeters
...
doesn't there?

Blogger Ahuehuete May 26, 2020 12:59 AM  

Will Hertz's (and other rental car companies') vast fleets be sold to individuals at steeply discounted prices, or will central banks buy them, after which they will never be seen again?

Blogger Damelon Brinn May 26, 2020 5:09 AM  

And there is no plan to ever repay the principle?

No. They always think they can make more profit from using/investing the borrowed money than they'd save by paying it off; and as someone said, there are MBA-thinking reasons why you don't want cash around. So if they did pay it off, they'd just feel like they had to borrow it again.

Blogger bramley say Enoch woz right May 26, 2020 6:15 AM  

Snidely Whiplash wrote:
I wonder how many Boomers are just not going to go back to work when the lockdown ends.


A lot of them will be taking up a new career as worm sustenance distribution manager.

Blogger Brett baker May 26, 2020 6:22 AM  

Please don't jinx another benefit of Corona-Chan, Snidely.

Blogger Avalanche May 26, 2020 8:29 AM  

@10 Until the Black Swan shows up.

The Peak Prosperity guy, I think it was, joked in passing:

Not a black swan; a black BAT!

Blogger Avalanche May 26, 2020 8:37 AM  

@32 "weirdly, RV sales are supposed to be up this year."

'cause you can LIVE in them! When you abandon your house, you've still got a place to sleep and pee!

Blogger Daniel May 26, 2020 8:41 AM  

Agreed. How the fuck companies like facebook are worth more than companies that actañially oen assets like oil companies? That is bs to me

Blogger Avalanche May 26, 2020 9:08 AM  

@79 "it's not a good idea to be rolling down a road at +50mph with poor eyesight and declining mental acuity and to not have a steel cage around you."

Some decades ago, when I was a service writer at a Holiday Rambler -- medium-high-end RV maker -- we had that old gent as a regular customer.

He'd take his Class A; the huge ones, integral engine; out once a year for a couple-week trip around. When he got home, he'd bring it in for us to repair the damage: he'd sideswiped a bridge abutment, he'd run it along a road safety barrier, he'd backed into a post...

I expect his insurance rates were insane; but they still covered the yearly multi-thous repair bills. And HE was a Silent; it's not just Boomers who do stupid stuff with money...

Blogger Val Martin May 26, 2020 12:10 PM  

There is no such thing as growth or recession. There is only the equilibrium of accurate asset valuations. Growth occurs when asset values are too low and recession occurs when they are too high. Wind farm are a net loss maker because they can never repay their capital cost withing their short lifespan and are of zero value. The are valued at 2 million Euros in accounts so watch out for Hertz Mk 2.

Blogger Bezzle May 26, 2020 12:49 PM  

Where is the "Big Bear's stream", and how may I partake of its delights?

Blogger Ominous Cowherd May 26, 2020 3:09 PM  

Avalanche wrote:He'd take his Class A; the huge ones, integral engine; out once a year for a couple-week trip around. When he got home, he'd bring it in for us to repair the damage: he'd sideswiped a bridge abutment, he'd run it along a road safety barrier, he'd backed into a post...
You need a CDL and medical cert to drive air brakes or 26000+ GVW, but you can drive a much larger RV with a basic drivers license, even if you never before drove anything bigger than a Prius. Not hard to figure out who has spent big on lobbying.

Blogger Scott Alfter May 26, 2020 3:52 PM  

Unknown wrote:The accounting side of it is much more lenient than the tax side, but there is no way Hertz will be able to dump tens of thousands of used vehicles on the market and get anywhere near book value.

I read somewhere last week that they were letting their Vettes go at prices starting around $58k, and that that was somewhere in the neighborhood of $10-15k below KBB. They obviously won't be able to maintain that sort of price delta on something like a Fiesta or Versa, but they'll be under pressure to cut all sorts of deals because everyone knows they're in a bind.

Blogger Unknown May 26, 2020 5:24 PM  

These people's thoughts were described well by Keynes: "In the long run, we're dead."

Aka "Eat, drink, and be merry, for tomorrow we die."

Blogger Jack Amok May 26, 2020 5:44 PM  

You need a CDL and medical cert to drive air brakes or 26000+ GVW, but you can drive a much larger RV with a basic drivers license, even if you never before drove anything bigger than a Prius. Not hard to figure out who has spent big on lobbying.

The Teamster's, who want to limit competition for jobs driving trucks?

Blogger Jack Amok May 26, 2020 5:54 PM  

Harley sales were down 5 consecutive years prior to the quarantine

Yeah, the Boomer's I know bought their Harley's about 10 years before they retired, then the motorhomes the year before they retired (hint: if you have any Boomers at work who have recently bought a new RV, you can probably pencil in the retirement party).

You're right that most of them start to worry about dumping the bike as they get deeper into their sixties. It's just part of the progression:

50's: buy the Harley
early 60's: buy the RV
mid-60's: sell or park the Harley
early 70's: wonder why none of these damned Millennial's have paid off enough of their student loans to qualify for enough of a mortgage to buy the McMansion so the Boomer can move into the Chardonnay Gardens at Woodstock Heights Sexy Senior's development.

Blogger furor kek tonicus ( *autistic screeching* ) May 27, 2020 12:23 AM  

98. Jack Amok May 26, 2020 5:44 PM
The Teamster's, who want to limit competition for jobs driving trucks?


they've done a piss poor job of that.

i knew O/Os back in 1980 that were making 6 figures with their own rigs.

you can still do that today, but if you take the compounded inflation rate stats seriously they should be making well north of 300,000 for an avg income. and operating costs are WAY higher.


99. Jack Amok May 26, 2020 5:54 PM
It's just part of the progression:


it also makes them look like a pussy when they can't get the bike back up off of the pavement.

kind of hard to pretend to be a badass when you're so dumb you let your bike fall over and you're too limp wristed to pick it back up.


96. Scott Alfter May 26, 2020 3:52 PM
and that that was somewhere in the neighborhood of $10-15k below KBB.


those are RENTAL Vettes, that's not a good deal. unless you've got a < 500 mile car, they've had the piss beat out of them.

what you want is something like a 2005 Vette that was owned by a retired doctor or something, you can get those for ~10 to 15k.

Blogger Ominous Cowherd May 27, 2020 11:03 AM  

Jack Amok wrote:The Teamster's, who want to limit competition for jobs driving trucks?
That was my thought. Also the RV manufacturers, to carve out an exemption for their products.
furor kek tonicus ( the 2nd Amendment exists so you can protect your daughter from molestation by Creepy Uncle Joe ) wrote:The Teamster's, who want to limit competition for jobs driving trucks?
they've done a piss poor job of that.
i knew O/Os back in 1980 that were making 6 figures with their own rigs.

Are the O/Os dues-paying Teamsters, mein furor?

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