Beware ‘the Mother of all Credit Bubbles

”Mortgage debt fueled the last bubble. Corporate debt is fueling this on”

There is a huge cost to this country from the Tax Cuts enacted by the Republican majority. They are now trying to package this huge scam unto the American electorate as a benefit. But our pocketbooks are telling the true story and if we don’t listen to what current household finances say and get some different legislative minds in charge we shall feel the disaster of a credit bubble even bigger than 2008 crash. The difference being not only will our financial sector be devastated but the corporate sector will all have serious problems.

Now, please don’t think the democrats will change this narrative because this problem will need all hands on deck. And a strong leader is needed to navigate these troubled waters along with the cooperation of many sectors in our society. As our past president stated in his speech in South Africa is first and foremost the top 1% must we willing to stop this power and money grab, How much money does one family or person need to survive comfortably?? Then we can get to the below issues of concern:

The end is coming: “It’s hard to say what will cause this giant credit bubble to finally pop. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.”

We know that all post-war recessions were triggered by rising interest rates. Rising interest rates eventually trigger a financial crisis when some borrowers fail to service their debts at the higher rates. The jump in bad loans forces lenders to cut lending, even to borrowers with good credit scores. The crisis turns into a contagion. A widespread credit crunch and recession results in The stock market falling into a bear market

Corporations will lead the next meltdown. The previous credit bubble was inflated by “households using cheap debt to take cash out of their overvalued homes.” This time,the epicenter of the coming debacle is “giant corporations using cheap debt—and a one-time tax windfall—to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks.” where future growth is sacrificed for current consumption. “diverting capital from productive long-term investment.” Instead, they are engaging in “financial engineering” by converting equity into record debt. And, corporate executives, wealthy investors and Wall Street financiers are getting richer.

Corporate bond debt at record high. NFC corporate bonds outstanding are at a record high of $5.4 trillion during Q1-2018, doubling since the mid-2000s (Fig. 6). But again, this may partly reflect opportunistic lengthening of NFC debt maturities. The spread between gross and net NFC bond issuance rose to a record high slightly exceeding $600 billion last year (Fig. 7 and Fig. 8).

These Buybacks are very troubling. Buybacks amount to “corporate malpractice,” observing that companies have been spending more than 100% of their net profits on dividends and share repurchases. That’s true. However, corporations collectively have always paid out roughly 50% of their profits in dividends, which has never been viewed as malpractice (Fig. 9).

The sum of buybacks plus dividends has been running around 100% of S&P 500 after-tax earnings (Fig. 10). That means that buybacks have been 100% funded by retained earnings (i.e., after-tax profits less dividends).

Corporate borrowing is increasingly risky. “In recent years, at least half of those new bonds have been either ‘junk’ bonds, the riskiest, or BBB, the lowest rating for ‘investment-grade’ bonds. And investor demand for riskier bonds has largely been driven by the growth of bond ETFs—or exchange traded funds—securities that trade like stocks but are really just pools of different corporate bonds.”

A greater part of corporate borrowing has come in the form of bank loans that are quickly packaged into securities known as CLOs, or collateralized loan obligations, which are sliced and diced and sold off to sophisticated investors just as home loans were during the mortgage bubble.”

Lots of junk has been piling up in the corporate credit markets, just as it did in housing’s subprime credit calamity during the 2000s. However, there was a significant stress test from the second half of 2014 through the end of 2015 in the high-yield market. The collapse of the price of oil caused credit quality spreads to blow out, especially for the junk bonds issued by oil companies. With the benefit of hindsight, that was an amazing opportunity to buy junk bonds.

My working hypothesis is that distressed asset and debt funds with billions of dollars waiting to scoop up distressed assets and debt at depressed prices may mitigate credit crunches. They may be the credit market’s new shock absorber. I believe that’s why the calamity in the oil patch was patched up so quickly without turning into a contagion and a crunch.

Leave a comment

Your email address will not be published. Required fields are marked *