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It seems like one of the key characteristics in a crash is a domino effect. Whereby companies' financials that previously looked solid are suddenly cast as unte

by ethbro 7y ago

It seems like one of the key characteristics in a crash is a domino effect. Whereby companies' financials that previously looked solid are suddenly cast as untenable in a new economic light. Usually because of an underappreciated correlation with a substantially removed market. E.g. most recently, banks and leveraged junk mortgages As you noted though, the biggest tech companies today aren't really externally dependent. They generate substantial cash flow, have relatively modest debt loads (better than heavier industry!), and don't have easy substitutes. The strongest case I could make for a tech crash: retail activity substantially slows and/or freezes (Apple & Amazon), advertising follows suit as advertising budgets plummet (Google & Facebook) But it's hard to see that happening with any rapidity in the US with unemployment where it is. (I can't see a strategic corporate debt crisis as long as the Fed keeps rates low?)

ummonk 7y ago
I think there are definitely systemic risks which could hit the US economy (small recession due to everyone cutting back spending to weather the recession, resulting in poorly profitable zombie firms - many of them retail firms - being unable to service bad corporate debt). It's noteworthy that we've been seeing retail bankruptcies like Sears and Payless in a consumer economy this good - what happens to other retailers when the sentiment turns for the worse? Note that low fed rates won't necessarily keep the cost of servicing debt low, if investors anticipate potential bankruptcies and flee from poorly-rated bonds. And yes, the big tech companies would certainly see revenues hit hard by such a scenario - but the big tech companies have plenty of cash to weather the storm.
- ethbro 7y ago
  Sears (and possibly Payless too) were mortgaged past the point of sustainability. That's fundamentally different from firms that accrued a lot of cheap debt, but have an ability to service it even under conservative revenue models. If I have 10%+ profit margins and could increase my revenue with additional capital, why wouldn't I sell as many bonds as the market will eat, at current prices? Provided I'm not expanding in financially risky ways (e.g. opening new stores or other delayed-revenue choices), there's not much consequence even if the music stops playing. Which is why you saw Ford and GM announce they're hording enough cash for multiple years of downturn.

by ethbro 7y ago

ummonk 7y ago

I think there are definitely systemic risks which could hit the US economy (small recession due to everyone cutting back spending to weather the recession, resulting in poorly profitable zombie firms - many of them retail firms - being unable to service bad corporate debt). It's noteworthy that we've been seeing retail bankruptcies like Sears and Payless in a consumer economy this good - what happens to other retailers when the sentiment turns for the worse? Note that low fed rates won't necessarily keep the cost of servicing debt low, if investors anticipate potential bankruptcies and flee from poorly-rated bonds. And yes, the big tech companies would certainly see revenues hit hard by such a scenario - but the big tech companies have plenty of cash to weather the storm.

ethbro 7y ago
Sears (and possibly Payless too) were mortgaged past the point of sustainability. That's fundamentally different from firms that accrued a lot of cheap debt, but have an ability to service it even under conservative revenue models. If I have 10%+ profit margins and could increase my revenue with additional capital, why wouldn't I sell as many bonds as the market will eat, at current prices? Provided I'm not expanding in financially risky ways (e.g. opening new stores or other delayed-revenue choices), there's not much consequence even if the music stops playing. Which is why you saw Ford and GM announce they're hording enough cash for multiple years of downturn.