“Stocks are floundering, credit spreads are blowing out and concern is building that a combination of higher interest rates on all that debt will begin to weigh meaningfully on corporate profit margins.
“There is angst in the marketplace. It’s not misplaced at all,” said Michael Temple, director of credit research at asset manager Amundi Pioneer. “But are we at that moment where this thing blows sky high? I would think that we’re not there yet. That’s not to say that we don’t get there at some point over the next 12 to 18 months as rates continue to move higher.”
“Over the past decade, companies have taken advantage of low rates both to grow their businesses and reward shareholders.
“Total corporate debt has swelled from nearly $4.9 trillion in 2007 as the Great Recession was just starting to break out to nearly $9.1 trillion halfway through 2018, quietly surging 86 percent, according to Securities Industry and Financial Markets Association data…
“One reason markets worry about debt is that there’s not as much cash around to cover it. The cash-to-debt ratio for corporate borrowers fell to 12 percent in 2017, the lowest ever…
“Sen. Elizabeth Warren spoke publicly about the threat in a recent public hearing, with the Massachusetts Democrat warning Randal Quarles, the Federal Reserve’s vice chair of supervision for the banking industry, that leveraged loans pose an economic threat on scale with subprime loans from a decade ago.
“The Fed dropped the ball before the 2008 crisis by ignoring the risks in the subprime mortgage market,” Warren said.
Simon Macadam, global economist at Capital Economics, also said leveraged loans, which generally are issued to lower-quality borrowers that already have a substantial debt load on their balance sheets, pose a danger.
“The main concern is a drop in lending standards,” Macadam said in a note to clients. “In the US, the share of leveraged loans with no requirements for borrowers to meet regular financial tests, such as maximum leverage and minimum interest coverage ratios, has risen from around a quarter in 2007 to a record high of 80% today.”
…“We all have to be very mindful of this buildup of debt everywhere, over the past especially five to seven years,” said Yvette Klevan, portfolio manager for global fixed income at Lazard Asset Management. “Overall, and I say this probably from a sovereign standpoint, debt can be a tax on growth. So that’s going to have a big impact in the medium term on a lot of countries.”
“U.S. borrowers filed the fewest applications for home refinancing in about 18 years last week even as mortgage rates drifted lower in step with U.S. bond yields, the Mortgage Bankers Association said on Wednesday… The mixed readings came as most borrowing costs fell with lower Treasury yields as investors moved into bonds due to volatility in the stock market. Worries about slowing global growth have roiled Wall Street this week.”
“The National Bureau of Economic Research lists 29 credit contractions in the last 145 years, which works out to one every five years. We’ve now gone more than 11 years since the one started in 2007, the longest run in recorded history. But credit is a lot like a forest. Trees grow before eventually becoming old and littering the ground with dry deadwood before some unpredictable spark triggers a fire that damages the forest. So while it’s hard to guess when or where the fire will start, a map of forest conditions can provide a decent sense as to where damage is most likely — just like with credit…”
“Britain has entered its worst period for business investment since the global financial crisis amid concern that crashing out of the EU will trigger lasting damage for the economy, according to a Guardian analysis of economic news over the past month.”
“Italy’s deputy prime minister Matteo Salvini has said he is prepared to confront EU leaders after the European commission rejected his country’s draft 2019 budget for a second time, while calling on them to “respect the Italian people”. Italy is facing sanctions after the commission said in a report that the government of the far-right League and anti-establishment Five Star Movement had seriously violated fiscal rules.”
“About 650,000 Tunisian state employees went on a nationwide strike on Thursday, after the government rejected UGTT union’s request to raise public sector wages, which could stoke further tensions in the North African country.
“Tunisia is also under immense pressure from international lenders, which urged it to freeze wages as part of public sector reforms aimed at reducing the country’s budget deficit.”
“Things are going badly,” said Delta, sitting on a stool and glancing at a bag stuffed with Chinese mobile phones. As one of scores of traders trying to legally sell her wares in one of Luanda’s most famous markets, known as “The Congolese”, the 32-year-old Angolan’s complaint is not unusual.”
The picture is of a New Year’s Eve party at a Miami nightclub owned by the daughter of Angola’s kleptocratic president, João Lourenço (tickets from $250).
“Mozambique’s electronic banking system has been plunged into a crisis over a debt claim by the service provider, the media reported. The O País newspaper quoted the Bank of Mozambique Governor, Mr Rogério Zandamela, blaming the Portuguese firm, Bizfirst, for the crisis… Bizfirst manages the software for the Mozambican Interbank Society (Simo), which controls credit and debit cards and other electronic payments in the southern Africa state… Bizfirst reportedly switched off the system last Friday over debt arrears.”
“As Venezuela’s economic crisis spirals, many people can no longer afford food.
“For many, meat has become a luxury item, prompting some to turn their backyards into urban cattle pastures.”
“Turnover in Australia’s housing market, as a percentage of all homes, has fallen to the lowest level since the early 1990s. That just happens to be the last time Australia’s economy fell into recession. The decline reflects a combination of factors, including continued affordability constraints in some of Australia’s largest housing markets, including transaction costs such as stamp duty that have risen as property prices have increased.”
“China has loaned billions of dollars to countries around the Indian Ocean and beyond for infrastructure development, stoking fears of a debt trap. The new Maldives government of President Ibrahim Mohamed Solih has called for a review of Chinese-bankrolled projects initiated under his predecessor Abdulla Yameen. Former president Mohamed Nasheed, now Solih’s mentor, has accused China of a land grab in the strategically placed Indian Ocean archipelago…”
“China’s falling stock market has prompted a flurry of activity to prop up prices… Investors have pulled about 3.2 trillion yuan ($460 billion) out of the market this year, according to net capital data from Wind, a financial information company. The exodus is even more striking given that foreign investors piled in after MSCI Inc. added A shares to its benchmark indexes. Absent those inflows, the slump would have been even worse.”
“At the meeting on Wednesday, where a slew of legal disputes over Trump’s trade policies entered a formal adjudication phase, US ambassador Dennis Shea said China was using the WTO to promote “non-market” policies, which had distorted world markets and led to massive excess capacity, especially in steel and aluminium. An unidentified Chinese official retorted that Beijing did not want to get into a blame game and said the United States had failed to back up its “unfounded” claims about China’s economy, which it was using to disguise its own violations of the WTO rule book.
“Both sides accused each other of hypocrisy.”
“Singapore’s economy expanded at a much slower pace than initially thought in the third quarter…
“The weakening outlook for the prosperous city-state – a bellwether for global growth because international trade dwarfs its domestic economy – underlines a shakeout in financial markets in recent months as investors worry about world trade, investment and corporate earnings prospects.”
“”Interest rates in many big markets have been at zero or even below zero during the past decade. This has produced a massive increase in debt levels all over the world. The era of cheap money is gradually coming to an end, and this could have massive implications for your portfolio [at the very least, lol].”
“The global economy has passed its peak and faces a slowdown driven by trade disputes and higher interest rates, according to a global economic watchdog.”
“The last time year-ahead forecasts from major global research firms were this pessimistic was during the depths of the financial crisis.”