Billionaire hedge fund manager Stanley Druckenmiller told CNBC Friday that the U.S. could be in trouble when the next recession hits thanks to the massive amount of corporate debt companies are holding. Druckenmiller isn’t the only expert concerned with debt levels around the world, as borrowing has seemingly accelerated in recent years to record levels.
Global debt rose by $3.3 trillion in 2018 to $243 trillion, more than three times the world’s gross domestic product, according to the Institute of International Finance.
The U.S. alone added $2.9 trillion to its outstanding debt in 2018, which climbed to more than $68 trillion. Last year represented the single largest year of U.S. borrowing since 2007.
Druckenmiller’s comments were focused specifically on U.S. corporate debt. The IIF found that nonfinancial corporate debt stands at about 73 percent of U.S. GDP and is already near its pre-financial crisis peak.
Given bloated corporate balance sheets, it’s understandable why the ratio of S&P Global Ratings U.S. corporate credit downgrades-to-upgrades in the first quarter of 2019 was the highest since early 2016.
Federal Reserve To Blame
The Federal Reserve should shoulder a large part of the blame for the situation, Druckenmiller said.
U.S. corporations are pulling in record profits, but interest rates remain so low that it is still extremely appealing to borrow. The latest U.S. jobs report Friday suggests the economy may be softening as the U.S. trade war with China ramps up.
At this point, Druckenmiller said the Fed is in a tough spot — and it may have missed its opportunity to normalize interest rates when it had the chance back in 2016.
“I deeply, deeply believe in a capitalist system you need a hurtle rate for investment and if that rate in not up there around 3 or 4 [percent], people are going to get crazy. Investors are going to get crazy, corporations are going to get crazy, zombies are going to stay in business and we had the opportunity to get there,” the hedge fund manager said.
The Federal Reserve has a fed fund target range of between 2.25 percent and 2.5 percent.
Rate Cuts Coming
The U.S. economy added just 75,000 jobs in May, much worse than economists expected. Druckenmiller said that weak number now puts the Fed on the path to easing by July.
The bond market is now pricing in a 98.6-percent chance of at least one Federal Reserve interest rate cut by the end of 2019, according to the CME FedWatch tool. The number is up from just 58.4 percent one month ago.