by Umar Farooq
America’s corporate debt has TRIPLED since 2008, from £1.5trillion ($2tn) to an eye-watering around £4.6tn ($6tn). And the borrowing bonanza has pushed the company debt to earnings ratio to a record high. This huge debt bubble is no longer sustainable, according to Tad Rivelle, chief investment officer at TCW Group, who has now raised the alarm. The asset manager has advised clients to start preparing for a serious shock and a “bad ending” to the credit bubble. The global debt fears along with many other factors is fuelling the imminent economic crash of 2017.
Mr Rivelle, whose firm looks after £150bn ($195bn) of investments, said: “Corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle. “The credit-fuelled expansion inevitably comes to a bad end… We’ve lived this story before.” The Bank of England and the European Central Bank are among the organizations that have continued to extend these credit plans that investors claim have now created large debt bubbles.
“In 2015, the trigger for a debt bubble burst came from China. The Chinese economy was slowing down, reflected by lower gross domestic product (GDP) statistics. Meanwhile, the Shanghai and Shenzhen stock markets kept crashing. Analysts fear repercussions in all emerging countries. Now the threat has more bite since Trump’s likely high-dollar economy implies that the Federal Reserve will move away from quantitative easing. Investors should not ignore the present debt risk for emerging markets. The alarmism of 2015-2016 may have been exaggerated. However, fears didn’t materialize because the Fed raised interest rates once, and only by a quarter of a point.” Alessandro Bruno
“Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” said the annual report of the UN Conference on Trade and Development (UNCTAD).
The policymakers would find it difficult act in the event of another downturn, according to Mr Rivelle. He said: “While every asset price cycle is different, they all end the same way: in tears. As obvious as this truth is to investors, when the sad end to the credit cycle comes, it always comes as a big surprise to many, including the central bankers who, reliant on their models, confidently tell you that no recession is (ever) in the forecast. But, successful, long-term investing is predicated on not just knowing where the happening parties are during the reflationary parts of the cycle but, even more importantly, knowing when the time has come to leave the dance floor. “In our view that time has already come.”
by Umar Farooq