A sharp analyst explains how rising interest rates are likely to clobber stock prices of large companies

"It's not possible to predict the future!"  Wait...is it?

I don't pretend to have any mystical perception, but a huge swath of future events are easily predictable to anyone who knows what numbers mean and can do simple math.

One such analyst is Karl Denninger, who seems to be very good with numbers.  He's been watching interest rates, including on bonds, and let's just say...well let's let him say it:

No, the stock market is nowhere near a "buying point" or bottom.  In fact its probably still substantially overpriced, even with the drop so far this year.  Here's why.

Interest rates.

For young Americans: Big companies raise money by either selling stock or issuing bonds.  Large companies often have $100 BILLION in bond debt--on which they pay interest every year.

Corporations almost never pay off bond debt, but instead "roll it over" by issuing new bonds to fund the cost of retiring bonds as they reach their "maturity date."  Since about 1980, interest rates have slowly fallen, so the cost of borrowing money has fallen.  So for the past 40 years, when a bond "matures," the interest the company must pay on the new one has been less each time.

That's great.  But what if interest rates start rising--as they're doing now?  

People say the Fed "can't" raise interest rates.  Except it did.  As a result, the rate on the 10-year Treasury is likely headed to about 5%, meaning a top-rated corporate bond should carry an interest rate between 5.5 and 6%.

This means that the next time the top-rated companies in the U.S. roll over their bond debt, which they all will within the next couple to ten years, every big bond-issuing company will be paying that 6%, where before the rollover they were paying 2 or 3%!  The only other option is for the company to pay the face value in cash.

To see what this will do, take a firm that's regarded as very well-managed -- Berkshire.  They have $119 billion in bond debt.  Let's assume all those bonds currently have a 2% "coupon" [interest rate], meaning the company is paying $2.38 billion per year in interest on those bonds.  

So what happens if the cost of carrying that debt doubles--much less triples?

Their net income is $11.7 billion, so if interest expense doubles that cuts their net income by 20%.  If interest goes to 6% net income drops by a massive 40%.

The current price of the company's stock is sustained by its impressive net income.  What do you think will happen to the stock price if that net income drops 40%?

Yeah, that's what I thought.

Given the quality of Berkshire's management, what you're going to find in most other firms is likely to be much worse.  Buckle up.

Source.

Just keep telling yourself:  "It is NOT possible to predict the future!  No one can predict the result of stupid government policies."  

Ah, you mean like printing trillions of dollars of currency and not expecting staggering inflation?  And then using your stolen control to pass a LAW cunningly mis-named the "Inflation Reduction Act" that doesn't contain a single inflation-reducing policy.  Yeah, who could possibly predict the result, eh?

I feel sorry for all the millions of Americans who have worked hard and obeyed all the rules for their entire lives, only to watch helplessly as it's all taken away by a corrupt government, installed by stupid voters and some paid helpers.