— Michael Pettis (@michaelxpettis) May 7, 2020
Homer Simpson once proposed a toast “with alcohol, cause and solution to all the problems of life”. For global companies that have drunk a lot, his line captures an unpleasant irony. The pandemic poses particularly significant economic risks for companies with heavily indebted balance sheets, a group that now includes much of the corporate world. However, the only viable short-term solution is to borrow more, to survive until the end of the crisis. As a result, companies will hit the next crisis with even more precarious debt piles. The cycle must be broken.
In the United States, non-financial corporate debt was around $ 10 billion at the start of the crisis. With 47% of gross domestic product, it has never been higher. Under normal conditions, this would not be a problem, because record interest rates made debt easier. Business leaders, by mobilizing, only followed the incentives presented to them. Debt is cheap and tax deductible, so using more of it increases income.
But in the event of a crisis, whatever its price, the debt becomes radioactive. As income drops, interest payments are important. Debt maturities become deadly threats. The risk of contagious defects increases and the system creaks.
Concentration occurs at market tops. There isn’t a specific level that marks the top. The fact that it is at the ATH doesn’t mean it can’t go higher, however the greater the concentration the greater the risk of collapse. t.co/VktcpPjUtS
— Anil (@anilvohra69) May 6, 2020
— 𝕮𝖍𝖎 🛢️ (@chigrl) May 7, 2020
NY Fed to buy corporate bonds in early May.
Front-running the Fed & #Winning
“Investors have piled into bond ETFs in anticipation of the Fed’s purchases. BlackRock’s $20B HYG, the largest junk-debt product, attracted a record monthly inflow of $3.7B in April”
— Danielle DiMartino Booth (@DiMartinoBooth) May 6, 2020
Long term Treasury yields are rising, understandably, due to a $4 Trillion growth of the National Debt coming in just the next few months. The Fed has manipulated “Investment Grade” corporate bond yields to below 3%. They will certainly want a lower ceiling for Treasury yields.
— Jeffrey Gundlach (@TruthGundlach) May 6, 2020
Not only in the US.
Money supply to central banks’ assets is collapsing worldwide.
It’s now at all-time lows.
Monetary stimulus perhaps not so fluid.
This is a liquidity trap. pic.twitter.com/3995GOelwU
— Otavio (Tavi) Costa (@TaviCosta) May 4, 2020
Covering the last 8 US yield curve inversions (‘66-‘06), the S&P 500 peaks 42W after inversion & bottoms 95W later at 137W on average. Today we’re just 49W post inversion, 11W post the peak in equities & now just 4% off the most extreme valuations in US history. #BearMarket pic.twitter.com/YDARVr85ft
— Julien Bittel, CFA (@BittelJulien) May 7, 2020