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At what interest rate does SP500 go bankrupt/zero (irrecoverable loss)

Is it possible?

Is question well formed?

It isn't possible. In extreme circumstances, they simply shut down the stock market -- e.g. Germany's stock exchanges were nationalized in 1933, closed at the end of WWII, and did not reopen until 6 months after the Nazis capitulated. The policymaker would intervene long before what you're describing happens. Some loss occurs, even substantial loss, but the loss is not 100%.

100% loss is possible but due to political circumstances - e.g. expropriation, as in the former soviet block once communism took hold.

Even without state intervention, going to 0% seems impossible. The companies in SP500 are value generating assets of some real, inherent value (it's not crypto or pokemon trading cards), so people will want to buy them if the price is low enough. Even if there's plenty of leveraged people who could run into margin calls and whatnot at the same time, there's also plenty of people with parked cash waiting to grab those assets cheaply just on such occasion.

Raise the interest rate high enough and it becomes cheaper to sell stock than issue debt.

If devaluing a country's financial markets is the object it is much easier to do it through hyperinflation. You still have high nominal interest rates, but severely negative real rates. Excessive taxation is another way.

ertyu wrote: ↑

Thu Dec 15, 2022 4:57 am

It isn't possible. In extreme circumstances, they simply shut down the stock market

The US did this too! For a few months in WW1.

The worst case scenario here isn't 0 it's Argentina

- what different it makes if market is closed? valueless asset somehow gets value back because it also untradeable?

- policy intervention can make companies solvent again but such intervention would be (formal or informal) reduction of interest rate. my question is "at what interest rate they all go bankrupt?" not "will government actually raise rates that high?"

- Iceland stock market lost ~99% value in financial crisis

prudentelo wrote: ↑

Thu Dec 15, 2022 4:27 am

At what interest rate does SP500 go bankrupt/zero (irrecoverable loss)

This can be calculated. Two ratios for seeing if a company can maintain its debt structure and remain in business are the interest coverage ratio and the acid test. When investing for safety, there's more focus on the debt structure, e.g. how many loans come due in 2023, 2024, ... etc. This will be discussed in the quarterly reports. Debt is rarely paid off as much as it's refinanced at the prevailing interest rates. So a company that has a lot of debt coming due in 2023 is likely a lot worse off than another company whose debt is not coming due until 2028, say.

The interest expense basically subtracts from the cash flow and the earnings. As such it lowers the E in P/E. That can be pretty brutal if I is a big relative to E. It's even worse if E has had a trend of growing, which usually makes for a higher than average P/E, and suddenly stops, because that will not only lower E but also P/E and therefore P by a lot.

One can certainly get to a point where the company is mostly working for the bondholders and not for the equity investors. At that point the equity won't be worth much. If a company can't even pay the bondholders, it goes bankrupt.

So yeah, to the first order, if you went through the bond structure of all 500 companies, you could calculate at what refinancing yield E went to zero.

You can do the same for the government debt to put a cap on how high rates can go before they cry uncle.

S&P 500 Quick Ratio 0.53

S&P 500 companies pay almost double the debt with cash. 0% chance the US equity market will be worth $0. Even if all corporate debt had a 1 day duration, there is no chance S&P 500 in aggregate would go bankrupt. Even at 100% rates, S&P 500 would have a value in the trillions.

https://csimarket.com/Industry/industry ... os.php?sp5

still confidence here ?