American Airlines went bust this morning, which should have come as a surprise to no one who has followed the company and airline industry over the years.

(The company recently denied bankruptcy rumors by stating that bankruptcy was "certainly not our goal or preference," which is about as close as a corporation will ever come to saying "Of course we're going to declare bankruptcy, you idiots, why are you even bothering to ask?")

But the bankruptcy WILL come as a surprise to the millions of Americans who have repeatedly been exposed to one of the consensual hallucinations that bullish investors and pundits have been mouthing in recent months:

To wit: Corporate balance sheets are the strongest in history and companies are awash in cash.

It is true that companies have plenty of liquidity, which they didn't a few years ago.

But corporate balance sheets are in fact no "stronger" than the balance sheet of someone who borrows a million dollars and then spends only little of it.

In other words, yes, corporations have lots of cash, but this is only because they have borrowed lots of cash. And as anyone who owes more money than they have will tell you, that's not exactly the definition of "strength."

These charts from fund manager John Hussman make this clear.

First, look at corporate cash as a percentage of debt and net worth. It's up a bit from recent lows, but hardly the highest in history:

Then, look at total debt as a percentage of net worth. See? Companies still have debt coming out of their ears.

Hussman summarizes:




Read the whole thing >