Coronavirus hits a Weak World Economy

A couple of weeks ago, I posted an article called Coronavirus hits a Weak World Economy. I listed nine things that have contributed to this weakness. Today, I added the following three points to that article.

• Many large businesses have weak balance sheets. Since the GFC, they have used cheap loans to finance share buybacks. These have pushed up the share prices for the benefit of shareholders, and particularly senior executives who are paid in shares or share options. Unfortunately, this practice leaves the business without financial reserves to tide them through a difficult time. For example, aerospace analyst Dhierin Bechai reports that:
  

  Boeing spent roughly $60B in buybacks ($40.6B) and dividends ($19.4B) in the past years while it generated roughly $55B in cash flows. Boeing returns all of its cash flow from operations to shareholders... Excluding 2019, we found that Boeing returns 92 percent of its operating cash flow and 113 percent of its free cash flow to shareholders.

  Coincidentally, or not, the $60 billion returned to shareholders is the exact amount Boeing requested in federal support for the aerospace industry.

  Jesse Fedler explains that the total net asset value of the McDonalds, Caterpillar, Boeing and 3M has fallen 90% from $70 billion just a few years ago to about $7 billion today. On average, these companies each spent $200 million per year on issuance of options to top management. Those very same managers were the ones who decided it was a good idea to leverage the balance sheet to buy back stock. This was done at the long-term expense of the resilience of their balance sheets.

• The problem with the current economic crisis and mounting job losses is the vast majority of workers are woefully unprepared for any type of disruption to their income going into recession. This will be a problem all over the world.

• The Chinese economy is weaker than it was in 2008/9 when it led the world out of the GFC.