• Warning signs for junk debt are now visible in the market, notes a report from WSJ. These signs indicate that companies with high debt are at high risk.
• After the last financial crisis, authorities have not been very keen on raising the interest rate, fearing such a move could trigger a slowdown. This meant that companies, including riskier companies, have had access to cheap money for almost a decade now. This allowed riskier companies to avoid default rates.
• Additionally, bond specialists are also maintaining distance from high-yielding debt as a precaution against expected financial distress ahead.
• As per the data from &P Global Ratings, the U.S. distress ratio rose to 9.4% in August from 6% in July. The distress ratio is the proportion of junk bonds that yield over 10 percentage points above Treasurys. Bond yield go up when investors want more money for their money.
• Investors are shifting their investment from companies with below-investment-grade ratings towards reliable companies. However, these reliable companies pay lower yields.
• To avoid the credit crunch, these junk-rated companies are resorting to price cut to attract customers. This, in turn, leads to lower earnings or even losses.
• Consistent decline in earning may result in the drop in the credit-rating category of the junk bonds. The triple-C rating is the lowest credit-rating.
• Most mutual funds and CLO get rid of loans with low rating when they expect more higher rating debt to drop into the triple-C level. As per WSJ, for the first time this year, selling was witnessed in triple-C-rated loans in August.
The Trump economy is failing
There are so many companies with astronomical amounts of corporate debt who will never make the returns to pay it off. Queue the zombie company apocalypse when the next corporate debt crisis hits. Just a week ago, Moody’s downgraded Ford’s investment-grade status. Ford handled the Great Recession with eloquence, but currently the new CEO seems preoccupied with the bottom line, China investments, and pure EV vehicles (that Ford cannot build yet!). These missteps, exacerbated by the China tariffs situation and the slicing of interest rates is making Ford and many others creep towards bankruptcy.
Corporate debt is climbing up to concerning levels, and combine that with the US economy that is propped up with American consumers who spend money they don’t actually have. We’re always shrugging our shoulders when it comes to our incomprehensible level of debt—and it comes out to the same thing: a dependence on borrowing will not sustainably drive your economy. With Trump’s reduction of interest rates & spending incentives, he doesn’t seem worried about the consequences either. The debt bubble will burst. Trump’s campaign promise to reduce the margins has failed miserably—they have skyrocketed! The great economic promises are crumbling. If we want another 2008, let’s just keep it up. Eventually the aftermath will arrive, and it will be impossible to look away.
Marching towards recession
Welcome to the Trump recession. Warning signs and talk of a recession have been amplifying over the past few weeks. And it’s not all too surprising following Trump’s trade war and slashing of interest rates. It’s like we are encouraging the behavior that led to the 2008 financial crisis. In simple terms, Trump is creating an economic downturn with his tariffs. Farmers are going bankrupt because of them—and the recent loosening of EPA small bodies of water standards seemed to be a haphazard attempt to remain on good terms with this group that makes up a part of Trump’s base. But if business leads to bankruptcy… Loosening on internal regulation won’t do much to stave off the outcomes if tariff deals aren’t renegotiated with China.
There are several warning signals. We’ve all heard that jobs have increased—which, presumably, would lead to increased productivity—right? Well, productivity has reportedly been stagnant, as the average workweek shortens and wages don’t keep up with CPI. GDP isn’t increasing either. And there’s no reliable brain to resolve it. Donald keeps antagonizing his trade wars without a comprehensible pay-off/strategy. Lower interest rates may be helping his dumpster fires (his businesses) afloat, but for the rest of the country? Expect a recession to arrive with a vengeance.
What's with the fuss?
Trump’s pro business approach is doing just fine, and will continue to be stable unless 2020 leads to the election of a Democratic Socialist. Obama’s doubling of our national debt, artificial constraint of interest rates, and endless regulation has slowly but surely been alleviated by Trump’s approach to our economy. It’s also hard to blame any kind of political development for junk debt trends. High yield issuers are always the teeming the line of default—it’s the name of the game! High yield issuers! It comes with risk.
And speaking of risk, this may actually be a pretty good time to buy junk: low interest rates and yes…high yields. The leftwing media is trying to inspire a recession with all of this talk—but as long as interest rates remain low, debt will be cheaper to refinance than it was just a year ago. Corporate debt has increased to buy back shares, to reverse the process you just sell shares. The debt bubble is an overblown concept that doesn’t consider the collateral we have—highways, buildings, hospitals, power plants, railroads, dams. Financial collapse is miles away from any kind of “warning sign” that we’ve recently been confronted with. If we keep talking as though the second 2008 is around the corner, we will just expedite its’ arrival. So how about we stop the premature worrying until there is a true indicator of imminent economic downturn.
Business as usual
What’s with the fear mongers? Studies have proven that simply enough talk of a recession can actually kick off a recession. Junk debt isn’t a problem of well-run organization; it’s more of a hassle for organizations run under bad management (unsurprising that Uber recently sold $1.2 billion of bonds rated in the lowest tier of junk). And in no way is political and economic policy an influencing factor on a business' management. People need to work more effectively, and solve the issues from within. It makes sense not to raise interest rates, doing so carries a possible slowdown. Sure, this allowed for riskier companies to borrow larger sums of money, but this doesn’t mean we will suddenly fly into a recession.
And if you look closer, the S&P figure that measures the percentage of below-investment-grade bonds yielding 10 percentage points or more above the Treasurys, it spiked in 2016 at around 12-13%. It has now seen a hike up from 6% to 9%. It just seems a bit premature to conclude that this is a warning sign of a recession, especially when the data that was used for this conjecture shows that the current level, which is touted as a “warning sign” has been reached 14 times in the last 36 months. We need more data points and a larger contextual analysis to determine whether junk debt trends are giving us an early indicator of a downturn. Laying off from risk and convincing people a recession is coming will become a self-fulfilled prophecy if we all behave according to inconclusive analyses of economic trends. It just doesn’t seem to be in our own best interests to worry about something that is not currently happening. But that seems to be the conundrum of the media nowadays—published is not synonymous with truth. We’ve got to remember that, today, is business as usual!