by WolfOfWoolStreet
Although some believe that QE and Central Bank purchases are sufficient to reduce credit spreads, investment-graded corporate bond downgrades are on a 20-year high.
I keep hearing on most media and among us retailers that the state of the wider economy will be bad for now but that the economy is much stronger than 2008 and the previous recession and we should get a quicker V shaped recovery. I’m confused by this narrative…
Global debt has nearly risen two-fold, it is now 85% higher in 2019 than 2008, as we have tried to pump up deflating economies. Inflation has stagnated, asset prices have ballooned way above wages and real-wage growth has reversed and has now been declining since 2015. At the same time we’ve seen incredible stock market growth, some 120% on the S&P in the decade 2010-20, in my limited understanding in part due to attempted inflationary monetary policy like QE etc.
That lending increase since 2008 ,on the back of very low interest rates and next to no inflation, means it’s very easy for large caps in particular to leverage to the sky. So the 2008 mortgage backed debt default warning seems to me to have gone largely ignored. Many companies of all sizes look ripe for bankruptcy due to pretty tenuous balance sheets after lots of spending on buybacks, lack of investment in growth and lack of protection against demand or supply shocks (like this one right now).
Ray Dalio (big fan) has been pointing out for years we are due a massive correction as part of a long running debt cycle and we should see a crisis the like of the great depression, drawing many parallels with the 1920-30’s global geopolitical atmosphere and today. I would highly encourage delving into one of his longer interviews or one of his books on the crises (below) where he explains the historical and macro economic precedent and the reasoning he uses.
2018 interview explaining economic theory of the idea in which he predicts a lot of the corporate debt issues that are slowly coming out right now:
link to his free open source book on the possible crisis: www.bridgewater.com/big-debt-crises/Principles-For-Navigating-Big-Debt-Crises-By-Ray-Dalio.pdf
The Covid affects might be comparatively limited but the wider economic indicators are not so bullish and IMHO are not being talked about anywhere near as much as they should. I can’t help but feel we’re not headed for a 30-40% two quarter recession but that cyclical depression which could reset some of the global economic foundations and concurrently cause much greater market pain than many of us are thinking which will last not 6 months to 2 years but far far longer. The Dow took 29 years to reach it’s previous high after the great depression (5100 points, 1929-58).
A Corporate Debt Reckoning Is Coming
It will deepen and prolong a U.S. recession regardless of Fed intervention.
Coronavirus Is Unleashing an ‘Economic Shock Wave’ Not Felt Since the 1930s
The Morgan Creek Capital Management CEO and CIO sees the Great Depression as the closest comparison to what’s happening to the coronavirus ravaged economy.
This recession will finally end the private-sector ‘debt supercycle,’ says firm that invented the term