Businesses and families are going into debt. It could be a dangerous trend.

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Square has acquired Afterpay, an Australian company that offers “buy now, pay later” services.

Courtesy of Afterpay

“Follow the money” was the famous advice given to Woodward and Bernstein in All the president’s men, and it remains applicable. Especially in these days of easy promiscuous money, borrowed for less after factoring in inflation, thanks to Federal Reserve policies.

To consider

Crocs

(ticker: CROX), whose shiny clog-like plastic shoes are back in fashion, judging by the pairs scattered around the home of the owner of Up & Down Wall Street by its younger occupants. Their fashionable owners further say that the Crocs have become the favorite shoes of some pop stars and rappers, which hasn’t hurt sales either.

All of this produced skyrocketing profits for the June quarter, according to colleague Teresa Rivas’ report last month. Since writing positively on the outlook for Crocs last September, stocks have more than tripled.

Ugly yet comfortable, Crocs are perfect in the era of the pandemic, where for many, dressing means wearing shoes. But financial engineering has also contributed to the success of their creator.

Last week, the company issued $ 350 million in 10-year notes, with a relatively luxurious 4.125% return, in what is laughingly referred to as the high-yield bond market, even though its yields are below the 5.4% year-over-year increase in consumption. – price index. This is still better than the 30-day yield of 3.25% on the

iShares iBoxx $ High Yield Corporate Bond

exchange-traded funds (HYG).

After Crocs offered the bonds, its stock hit a record high on Thursday, observes Cliff Noreen, head of global investment strategy at MassMutual. The link: Proceeds from the debt issuance were first used for share buybacks and the rest, if any, for general corporate purposes.

The management of Crocs benefits from this. Like the Almost Daily’s Grant newsletter, published by illustrious Barron Jim Grant, alum, points out that the top brass sold 238,578 shares, for net proceeds of $ 21.4 million, at the same time as the company borrows to buy back shares.

The money trail is easy to follow, from the Fed’s persistent purchases of $ 120 billion per month of Treasury and agency mortgage-backed securities, to the coffers of bond investors, who then have a excess cash to be used. They therefore buy corporate bonds, the proceeds of which can be used to buy back shares, including from the companies’ own management.

This may not be the intention of the central bank solons, but it is what they did: a godsend for Corporate America and its C-Suites.

Another notable deal last week was

Square‘s

(SQ) purchase of

After payment

(APT.Australia), an Australian company that offers “buy now, pay later” services. I had associated this term with old layaway plans, but the practice – now updated and abbreviated as BNPL – allows impulse shoppers to buy big or not-so-big items for bite-size payments.

A pair of $ 200 sneakers can be purchased in four painless installments of $ 50, paid automatically from your debit card, or the bill for an expensive exercise machine can be spread over five years. Everything is irrelevant to consumers. For retailers, the profit margin is sufficient to make absorbing the cost of financing worth it to break any resistance to sales.

What is also surprising is that the BNPL model runs counter to perceptions that consumers have plentiful savings, fostered by uninterrupted incomes for those who continued to work during the pandemic and stimulus payments from the world. government to those unlucky, combined with spending constraints during lockdowns. In particular, from late 2019 (before the pandemic began in the United States) to the second quarter of this year, consumers paid off $ 140 billion in credit card balances, according to the New York Fed. .

But in the last quarter, credit card balances resumed their rise, increasing by $ 17 billion after a decline of $ 49 billion in the first quarter. Overall household credit increased by $ 313 billion in the second quarter. The lion’s share of that was in mortgage lending, up $ 282 billion amid the housing boom.

The rise in consumer borrowing is also apparent in the latest quarterly opinion poll of the Fed’s senior credit officers, which found an increase in demand for loans and an easing of bank lending standards for credit cards. credit. This marked a reversal from the onset of the pandemic, when credit standards were tightened and demand for loans plummeted, JP Morgan economist Daniel Silver wrote in a research note.

But Americans’ greater willingness to borrow may not be a sign of confidence. Consumers are in a bind, inflation rising faster than their wages, even with the fastest wage gains since 2009, writes Stephanie Pomboy of MacroMavens in her latest client note. (The trend was noted in this space last month.)

Given the surge in prices and the fall in real wages (adjusted for inflation), consumer loans have jumped, Pomboy continues. “After paying off the debt with the Covid stimulus, consumers began to take on debt the month after the last batch of checks hit the mailboxes of the stimulus bill passed in March. Coincidence? I doubt it, “she writes. Low-income households are forced to borrow to cover the higher cost of living, which is not a positive development,” she concludes.

For people whose finances are strained by inflation, using BNPL to help pay for luxuries or even necessities, like an updated wardrobe for getting back to work, could be the deciding factor. in the purchase decision. Square’s ability to provide ready financing to merchants and consumers apparently justifies the $ 29 billion price tag for Afterpay, equivalent to an enterprise value of 35 times gross profit for the next 12 months, according to MoffettNathanson analyst Lisa Ellis. But this belies the notion of flush consumers.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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