THE WOLF STREET REPORT

How the Corporate Debt Bubble Will Crush Stocks.

Corporate debt, after years of encouragement by the Fed via artificially low interest rates, has reached historic levels. Now even the Fed is worried about its handiwork. Many of these companies will default over the next few years. This is a cleansing process that is part of the business cycle – only this time, it’s so much larger (12 minutes).

Instead of “bubble” or “collapse,” it uses “valuation pressures” and “broad adjustment in prices.” Business debt, not consumer debt, is the bogeyman this time. Read… The Fed Explains the Rate Hikes: To Prevent Financial Crisis 2

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  74 comments for “THE WOLF STREET REPORT

  1. mick says:

    I love these!!

  2. Hulk says:

    “How the Corporate Debt Bubble Will Crush Stocks”

    I think you’re counting your apocalyptic chicken’s eggs before they hatch. The market is starting to see beyond the current hiking cycle. The only way the leveraged loan market will tank is if GE goes under. Everyone knows this, so it won’t be allowed to happen.

    • Wolf Richter says:

      Listen to the report. This isn’t about the “current hiking cycle” but about corporate debt defaults and what these defaults do to stockholders.

      • yngso says:

        It seems Hulk thinks we’re in normal times, and that things can be dealt with the normal way. In the last decade the economy has moved far away from normal. Imbalances and complexity and fragility have increased exponentially, so when things fall apart more than just stockholders will get hurt.

      • Jerry says:

        Wolfe do you ever give recommendations on how small investors should manage their capital accordingly? I have taken much of my cash out of market but don’t know what to do with it. Some is in retirement accounts so I am more limited in my options. I am looking to pull the rest out as well. And guidance would be appreciated

        • Wolf Richter says:

          No, I don’t make recommendations. Financial advisors get paid an arm and a leg to make these kinds of recommendations. It’s their job. I would certainly not do for free what financial advisors are getting paid an arm and a leg to do.

          However, you can read my stuff and use it, along with other data, to come with your own conclusions what works best for your situation. Good luck!!

        • mtnwoman says:

          Would you do it for pay? ;-)

    • D Rock says:

      Yeah, because GE isn’t going anywhere… they’re super solid lol

    • yngso says:

      See my reply to WR below.

    • kevin says:

      i remember back in 2007/08 and the following years thereafter, ALL the headlines were giving the same message and practically everyone was constantly talking about how massive QE and the consequent global debt was going to collapse the world economy….and then some.

      But more than !0 years hereon, has anything collapsed yet? Nah…
      – No worldwide depression.
      – No bankers were jailed.
      – No politicians were found guilty.

      Umm, some “Occupy Wall Street” protests occurred here and there, but pretty much everyone went back to their lives struggling financially, as the masses always have since the Middle Ages.

      My point is, has anything changed FUNDAMENTALLY since the last 2008 crisis?
      My short answer is no.
      Are the sheeple angry enough to rise up for a global revolution to remove all fiat printed money? What are they going to replace printed money with? Bitcoins? Gold coins for grocery trips? ;-p

      Even the yellow jacket protests in France are petering out because they need a break during the festive new year and time for some beer.

      I mean, yeah…the PIIGS economies in europe are seemingly struggling, but hey, even Spain’s property market ‘”recovered” somewhat, and Italy’s moribund zombie banks are still kicking. So what gives?

      If the stock market tanks enough, the FED will certainly reverse course and lead the global CBs with the next ZIRP/NIRP/ “whatever-it-takes” once more, and I am sure the stock indices will ride up again for another 10 years.
      Granted that 10 years is a relatively short period in financial history, but the fact is most Bears were painfully wrong for the past 10 years.

      Many sheeple folks still don’t get it. There has been no fundamentals to speak of since 10 years ago (some would argue that this corruption has been going on far longer than that); so what makes you think this time its inherently going to be any different?

      Yeah yeah…I know, the FED and all the CBs may run out of space for trailing 000s to print, but I’m saying fundamentally, nothing has changed. Those CBs and the Too-Big-to-Fail corporates are still very much in power with the same system of financially dubious book-keeping.

      Since the CBs can print till Kingdom come, they can always add trailing zeros on their cheques. If too many 000s becomes unwieldy, they can suddenly announce a new monetary unit to replace the zeros, via Government decree. And I will bet everyone will simply just go back to their 9-to-5 work schedule the very next week.

      Until there is a viable ALTERNATIVE to the fiat monetary system of the Central Banking Cartel, the same cycle will keep repeating itself.

      There will be no global economic collapse.
      The only collapse will be in the individual finances of ordinary households in increasing numbers.

      And no, the rich 1% will not suffer any dire consequences. They may not have enough consumers with disposable cash, but who cares….they will and are already replacing the proletariat with robotics and AI.

      With sufficient AI and robotics, you do not need that many human workers anyway.

      The poor will die of hunger or cold during the ensuing winter.
      The middle-class baby boomers will eventually die-off and their debts will also magically be wiped away too.

      Once the Baby Boomers expire from this Earth, all the government and corporate pension liabilities will all but disappear right? It is just a matter of time and patient waiting for the inevitable clean slate to arrive.

      • Robert says:

        Hyperinflation completely eroding confidence in a fiat system I think would be the rebuttal.

        • Kasadour says:

          Exactly. The gig is up. The FED can’t repeat QE again and again to infinity. As i said further on down in this thread, the FED has to address its own insolvency one of two ways: selling the assets on its balance sheet for 50 cents on the dollar and get those dollars out of the system, or raise interest rates. Otherwise it’s back to the same old game of QE and ZIRP. I postulate that an insolvent FED leads to a currency with little to no purchasing power. And the solution to this is waiting for people to die and/or hoping they die before the currency dies? How utterly bleak!!

      • Richard Marx says:

        Post of the Year.

      • Tinky says:

        lol! You had me checking my calendar to make sure that tomorrow isn’t April 1st, rather than January 1st.

      • Maximus Minimus says:

        Probably only about 10% of the population would know what you were talking about. The rest would think you have escaped from an asylum. Does it adequately answer your points?

        • kevin says:

          Maximus Minimus, that’s why I’m making money & building wealth, despite the scams of the FED / CB & the big corporates, while 90% aren’t.
          Kind of makes you wonder who should really be in the asylum.

          Anyway, I don’t need any answer nor rebuttals from anyone. Everyone answers to himself or herself for the choices they make in their own life.

          Those who know will get my New Year message, and those who don’t…. don’t. It doesn’t cost me nor those reading it anything at all. lol.

          So carry on or make better choices however you want, and most of all have a Happy New Year!

      • That last point is worth note, in twenty years the Baby Boomers will be gone. While the Mils will be forty instead of twenty. To their end the decreasing size of families means they will inherit more wealth. Those from cultures who over populate are going to grow poorer, while the cost of health and education rises in order to effectively tax those wealthy (survivors). Hence smaller families and higher taxes.

        • Mark says:

          I have news for you. I am a baby boomer and I am 63 and will most likely not be gone in 20 years. There are many baby boomers years younger than I am. The percentage of people over 65 will rise far into the future.

        • Read the actuarial tables. The real point is where the transfer of wealth occurs, does that wealth go into the HC industry, or to the children, or to charity. (or to the cruise lines) The old saying is “It’s later than you think..”

      • Michael Goodwin says:

        Summed up very well! It’s hard to play fair in any rigged game.

    • MD says:

      “The market is starting to see beyond the current hiking cycle…”

      Utterly meaningless phrase, predicated on the belief that company fundamentals no longer matter, their debt doesn’t matter, and that worldwide governments will be able to keep the plates spinning without consequence.

      I know I’m not alone in being amazed by the fact that people seemingly like yourself can look at ridiculous practices such as debt-financed stock buybacks, and shrug your shoulders and believe the party can keep going in such fashion i.e. that financial engineering and rampant leveraged speculation can and will continue to levitate markets.

      Astonishing.

      • Paulo says:

        Good comment MD.

        My opinion is that all debt matters while accepting that there is both ‘good debt’ and ‘bad debt’. Trying to live an undeserved/unearned profligate lifestyle using debt is definitely not a good thing to do. (This goes for companies, countries, and individuals). However, taking on some temporary debt in order to provide a jumping off platform for increased sales or being able to purchase a deal of the century is common sense. Buying Alaska was good debt. Borrowing a trillion every year for Govt services is bad debt. Similarly, financing stock buybacks for executive compensation bonuses is probably not too smart for any company with an eye on a future more than 2-5 years.

        Hangovers hurt. In the neighbourhood Guido employs a debt collector. In the World Guido uses the IMF to kneecap slackers. In business, companies turn into GE and Trump Casinos. For Reserve Currency countries believing they are impervious to debt realities look no further than Britain, Holland, France…even Greece.

        Debt matters.

        • sierra7 says:

          Paulo: “Debt matters”
          Yes, and it is also highly “marketable”. So instead of being a drag on the “market”, it becomes an asset. (Until it doesn’t) Just dropping thoughts as I read thru these comments.

    • rhodium says:

      Have you looked at yields on bonds at all lately? They’re spiking! They haven’t stopped either! How can many companies possibly roll over their huge debts at higher yields over time without damaging their cash flow? Businesses all over are going to go into heavy cost cutting mode as long as yields going up… Unemployment will spike back up, demand will be down and stocks of course will be down down down.

    • Lenny says:

      it is inevitable that GE collapses, just when is the question.

  3. Bobby says:

    In hindsight, I think the fed waited far too long to raise interest rates?

    • yngso says:

      The Fed knows very well that times haven’t been normal the last decade, and now “normalizing” is impossible.

    • It would not surprise if the Fed jumped rates, in the event of a credit crisis, they might actually be behind the curve doing so. Their reason would be to provide greater liquidity, and zero rates would only induce volatility. This puts them at odds with Treasury who wants to fund (lots) new spending. It goes back to my thesis the Fed will set yields low at auction and discount their new paper, using the outsized gains in the dollar to cheapen the currency, and restoring the trade balance. Higher rates to savers would provide consumer stimulus, and the banks would chew poop. If you are going to have a recession anyway, why not invert the yield curve?

  4. Frugal in the Bay says:

    Hi Wolf,

    Thanks for this great report. I’m a novice in this space. Can you explain the mechanism for how the Great Recession prevented these companies from getting corporate debt? Was it the Fed or Stimulus Plan?

    • Wolf Richter says:

      Yes, that was the Fed. It flooded the land with cash and repressed short-term rates to near zero. Investors went chasing after all kinds of assets that had some yield (such as corporate debt), and they went out on the risk curve to get it. This was the specific goal of the Bernanke Fed. It wanted to force investors to take more risks but without getting paid for taking this risk. QE and ZIRP were a big part of this scheme, as were some other things, such as “forward guidance,” and some other strategies.

      • WantOut says:

        Why would the fed have wanted that?

        • Kasadour says:

          It didn’t. But the risks were inherent and investors took them anyway because they had to, they knew the FED had their back, so to speak. Now the FED doesn’t have their back anymore. Conclusion: a system designed to fail will probably fail.

      • Willy2 says:

        – If you think that the FED is able to determine (interest) rates then look at what happened with e.g. the US 2 year yield since early 2013.
        – In both 2013, and 2014 that rate (supposedly) rose as a result of the Taper tantrum and the socalled Taper. No, the FED was able to “Taper” as a result of the rising yield(s). The proof was provided later (read on).
        – In 2015, 2016 and 2017 that US 2 year yield kept rising in spite of no changes in the size of the FED’s balance sheet.
        – And the 2 year yield fell with the drop of stockmarket in spite of the ongoing QT of the FED.

        • Wolf Richter says:

          Willy2,

          The Fed doesn’t “determine” interest rates. The Fed uses its trading desk to move the federal funds rate (overnight interest rate) into its target range, and it does this to loosen or tighten financial conditions in the credit markets.

          There are numerous measures of financial conditions, including spreads that show how risk is being priced. When spreads widen, as they have been doing over the past few months, financial conditions are tightening, meaning that investors demand to be paid more yield to take on a given risk. This makes it harder and more expensive for risky companies to borrow money. Which is what “tightening financial conditions” means. This is what the Fed wants to accomplish.

          However, there is a long lag between changes in monetary policy and the market’s reaction to those changes (tightening financial conditions). In this rate-hike cycle, the lag was over two years. In the past, when rate-hike cycles were steeper and faster, the lag was 1 to 1.5 years.

  5. William Smith says:

    So in late/end stage capitalism, when the majority of people’s material needs are mostly met (those that still can have jobs), it becomes a credit driven economy (in order to continue growth). The early-stage economic expansion was needed to supply the goods required. However, as we are approaching peak-tech and most needs are now satiated by automation, rampant growth of the past would seem to be not possible or even detrimental. You seem to be saying that the “fed” has added a lot of leverage to the previous GFC, thus inflating the inevitable “correction” and evaporating a lot of (fictional) value in the process. So we have peak capitalism and peak tech combined with a fiscal can that can’t be kicked down the road much longer. Am I mistaken in seeing a fundamental structural issue with a (ponzi) system that can only exist by ever increasing growth? Can there be such a thing as post capitalism maintenance mode? I thought china’s mix of communism and controlled capitalism might be an answer, but they seem to be regressing back to cult-of-personality authoritarian communism just like russia. So we don’t appear to have any alternative system to replace either capitalism or communism with. At some stage, mankind is going to have to deal with the real elephant in the room: greed (with is definitely *not*good*).

  6. Bill from Australia says:

    A very sober and honest commentary, as usual Wolf. All the best for you and your family in 2019

  7. vinyl1 says:

    The larger corporations have a lot of options. They can use their huge cash flows to pay down debt instead of buying back shares, or they can sell off a few lines of business to raise cash. If worse comes to worse, they can always sell the stock they bought back.

    I don’t think interest rates will rise as rapidly as many pundits expect. This gives everyone time to prepare, and clean up their balance sheets.

    • yngso says:

      Vinyl. what you say sounds correct for normal times, but times ain’t normal. Tiny interest increments now have an enormous effect. Who’s going to buy assets when everybody is in a liquidity squeeze?

    • Dale says:

      Giving everybody warning to clean up their balance sheets was exactly what the glacial pace of rate hikes was intended to accomplish. Unfortunately, few paid attention, causing the Everything Bubble to continue expanding.

      Powell understands this well. FOMC transcripts from 2012 show that he saw bubbly behavior even then.

  8. Kasadour says:

    This is anything but a “healthy” end of the business cycle. This is a rigged loop of debt finance/forfeiture on QE steroids. The creditors, whom, as you aptly mentioned, caused this nightmare to begin with, will be rewarded with debtor forfeiture of assets in bankruptcy, but it won’t be enough to cover the losses. It wasn’t last time and it won’t be this time. The creditors will have to be bailed out, again, however now that the FED itself, indeed most all central banks, is a creditor, how is that going to work?

    Shareholders will get wiped out on down to any retiree expecting to receive a pension until they die. The losses will be far reaching- into the strata(m) of all middle class wage earners. This is yet to show up in the real world, but WHEN it does, it’s going to be a nightmare of nightmares.

    • WantOut says:

      Care to fill in the missing arguments? Also, wouldn’t the Fed being a creditor make it trivial to bail itself out by not doing anything?

      • Kasadour says:

        If the FED is insolvent then the dollar is insolvent by nothing other than lost purchasing power.

        To “bail itself out” the FED would have to sell whatever toxic mess is on its balance sheet for pennies on the dollar thereby removing those dollars from the system, or raise interest rates. One or the other. Otherwise the currency goes to zero.

        One could say a severe forest fire is healthy for a forest but it also depends on whether is a natural fire or arson and whether the fire encroaches populated cities and towns or is contained.

        People lose everything and some die. I wouldn’t call that a healthy forest fire.

    • HMG says:

      “A nightmare of all nightmares”

      Great phrase.

  9. Trinacria says:

    Excellent report, puts it all in good perspective. Years of artificially low rates coupled with Quantitative Easing had led to this. My lovely wife, a classical musician with no knowledge of finance, always thought Quantitative Easing sounded more like a laxative….well, the result may soon be similar !!!

  10. Rowen says:

    Hooray for ESOPs!

  11. Iindie says:

    Great report , very detailled ! 2019 promises to interesting !

  12. Kaz Augustin says:

    Missed the Christmas greetings, but Happy New Year to you, Wolf, your family and all the curmudgeonly, entertaining and incisive commentators who visit this watering hole. Long may it (and you) prosper.

  13. OutLookingIn says:

    The Fed Conundrum.

    They must raise rates to provide themselves some wriggle room, when this present debt edifice that they helped build crashes.
    Only money becomes more expensive to borrow and to service interest payments on the present debt. Liquidity shrinks.
    When the supply of money/debt is reduced the economy tanks.

    Here’s where it gets interesting. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is KEY for the present system of debt to continue.

    This is the trap that the Fed has built for itself. No way out.

    Protection of wealth is at hand in the form of physical gold. Gold is nobody’s liability and can’t be printed. It dominated the international monetary framework until 1971 as a stable anchor. This changed not because gold lost it’s value, but because the US found the role of the all mighty dollar threatened by gold. So Nixon at the behest of bankers, had what was left of golds monetary role, taken down a blind alley and strangled.

    You may control the narrative, but never control an idea that has value.

    • Robert Miller says:

      Ooooo nice! Like a Chinese finger trap!

      To play devil’s advocate to this trap thesis… surely the overall debt issue and even the TIMING of its demise could have been calculated / modelled way in advance. Is the end really upon us? Seems too convenient. There have always been doomsayers since the dawn of time. Somebody will eventually be correct but is it now?

      • OutLookingIn says:

        “could have been calculated/modeled” Maybe?
        Highly doubtful.
        THE KEY:
        Asset values must be propped up. Far too many so-called “assets” sit upon a foundation of debt. When credit/debt is withdrawn, the liquidity which the system relies on to continue disappears.
        When debt disappears, money is destroyed. It disappears.
        The consequence being? Asset values crash.
        Markets ALWAYS revert to the mean. Often over shooting below the mean and then oscillating over and under.
        Convenient? When has an economic crash ever been convenient?

  14. hotairmail says:

    I love it, looking at the comments it seems the holiday break has altered many people’s panic mode to one of being sanguine and the market falls being overdone. Back to normal. Yet Wolf is talking about the bigger picture of the overall backdrop that looms over us all, that the markets only from time to time pick up on as in the weeks before Christmas.

  15. HR01 says:

    Wolf,

    Aye, another debt maturity wave about to hit the next two years. Last time we saw a wave like this was 2013-2014. Warnings came out in 2012 but of course there was no need for worry. Rates were still declining and refinancing was cost-effective, funds plentiful.

    Not so this time. Approximately $1.3T due. Good luck to those needing to refinance. Gonna cost, assuming can even find willing lenders. Credit markets freeze up and it’s game over for marginal credits. Outfits like GE (declining cash flow) likely won’t make it, absent yet another bailout (highly unlikely).

    Complacency still rains. Few prepared for what’s ahead.

  16. Gershon says:

    Are the Keynesian fraudsters and serial currency debasers at the central banks in China and Japan preparing to embark on an epic new round of counterfeiting, i.e. “stimulus,” in effect doubling down on their failed monetary policies? Will the Fed be joining the printing party?

  17. Mike Are says:

    In my view, much truth in most of our comments and Wolf’s excellent analysis, just a matter of degrees.

    There is no doubt that ZIRP helped create a monster of excessive corporate debt to goose stock prices via EPS. I personally believe that this was sanctioned by Obama’s administration and communicated to many heads of US corporations. When the CEO’s asked about what would happen down the road, the reply was likely that new QE would buy stocks and corporate bonds.

    Again, that is my view of what has been going on and of course I have no direct proof, but it seems awful hard to believe that all these corps followed the same path without some form of assurance of survivability.

    Now this would have been Obama/Bernanke/Yellen. Totally different people and views than today’s Trump/Powell. Perhaps even, the current folks aren’t even aware of what was encouraged, almost sanctioned by previous team. Possible??

    At any rate, after 10 years of “recovery”, the US economy was close to reaching debt saturation in housing, autos, etc. The raising of interest rates by Powell only helped slow it down further. Many corps with excessive debt will have a hard time paying down debt when business drops and cash flow slows.

    This too, is why Trump/Congress were so relieved to pass the corporate tax reduction bill last year. That reduction breathed some needed relief into corporate cash flow. But it will likely not be enough if the economy slows as much as I think it is going to.

    The “establishment” want Trump out because he is a major disruptor. He will and is unwittingly messing up all sorts of plans to keep the status quo going. To my mind, that and the potential taht Powell lacks basic understanding of the “game” could be the country’s undoing and move us to crisis a lot sooner than the “establishment” would have liked.

    Make no mistake, we were always going to have a crisis/major reset and it will indeed be ugly. The only question is when and how long it can be postponed. Trump and Powell may make it a lot sooner than everyone may want.

    • WES says:

      Mike: After nearly 50 years of globalists/Wall Street shoving their versions of “Fair” trade down the throats of Americans while shipping American jobs overseas, is it any surprise that Americans voted in an outsider to change the focus of America’s economy from Wall Street back to main street?

      The termoil you are currently seeing is Wall Street’s fake financial markets shrinking while main street’ s economy is starting to grow again.

      Powell raising interest rates hurts Wall Street’s economy (that has become much larger than main street’s economy) much more than main street’s economy.

      Walls Street’s fake economy was built on the foundation of financial repression or free/cheap money/credit at the expense of main street.

      The popping sound you hear is coming from Wall Street!

      Right now main street Americans are benefiting from some tender loving care, for the first time in 50 years, thanks to President Trump!

  18. Realist says:

    As always, Well worth listening to. Keep up the good work Wolf !

    One thing I do wonder about is public debt, ie government, state and local debt, both in the US, but elsewhere, too. Such debt is probably managed as long as there are people/organizations accepting the IOUs issued.

    Another thing that will be interesting to see is the effect of the combination of the Fed ( and possibly later on other CBs ) withdrawing liqudity as the try to clean up their messes combined by increased public deficits that somehow has to be financed. When you add to this problematic corporate debt, what will that do to the general economy ?

    Keep in mind that bancruptcies always do mean layoffs.

  19. Dan johnson says:

    Glad to report Wolf that your site is the only financial site not banned Cuba!

    Feliz nuembo annos to all

  20. Leif says:

    Thanks Wolf,
    I always enjoy your calmly presented point of view.
    As we see thing ahead, I wonder what ways of capital preservation are there. For me, it’s a total conundrum on where to hide and ride this out. Right now I prefer cash and UST’s and only some stock related to hydrogen and electric mobility (not TSLA), which will be government-backed and subsidized, I guess. It simply does not feel save to park cash with a bank in that point in time. Some gold yes, but you don’t park your life savings in gold and expose your self to its prohibition, right? Cashing out and taking your CB money off-grid, well that’s also risky when it comes to your life savings. I wonder what the audiences allocation in capital preservation mode would be like?

    Best,
    Leif

    • NotBuying says:

      I, for one data point, have moved my retirement savings into a money market account that invests in short term treasury securities. They pay a rate just above inflation (depending on the interest rate environment, which is improving). I am sitting on the sidelines until there’s been a decent enough correction to come back into the stock market. Right now we are a long way from that, and the market having these whip-saw days is further reinforcing that there will be more pain ahead and investors have no idea what they’re doing.

    • Mike Are says:

      Invest in cost effective methods for insulating your house, if it needs it. Consider spray foam in attic, encapsulated crawl space if you have one, good windows, door seals, etc. In the short term, energy prices are sideways, but in the long term, prices are going up.

      Invest in a solar PV system that covers most of your house loads. Good for the world (climate change) and with tax credit and many utility rebates, a 12-14% ROI. You’ll end up spending about 12K for the average house. And when electric prices skyrocket up in the coming years, you’ll feel like a genius.

      Just a couple of ideas.

    • Bob says:

      Store beans, bullets, and bullion (in that order).

  21. ISMAR says:

    Happy new year Wolf economy is not mathematic you can change the methode everytime whan you decide to manipulation with numbers lies i live in Paris every western state is bankrupt they need another credit money debt to pay former credit debt they never pay the debt they will day with debt too.Resset will come whan they decide you know who is behind

  22. njbr says:

    The biggest warning of the coming years is the choppy and eventual down year–all after what could be argued as the biggest corporate stimulus in recent history. When a predicted 6% GDP growth turns into 2.5 to 2.7 (GDPnow), shouldn’t that tip off everyone that it didn’t work ?

    When Volker raised rates to 18%, Reagan grumbled…but took it for the country. The .25% increase of the current Fed would have been negligently low if indeed the 6% had been materializing–instead it is called as the knife in the back (of a booming economy ?). You don’t have to be much of an analyst to realize that the engine is sputtering.

    And take comfort, billions over the millennia lived lives of personal joy and satisfaction without stocks and bonds, and indeed without much to eat and little to moderate the harshness of their circumstance. Be glad you live in a country that provides you the shelter that it does, because a large part of the world envies us. In our quest to maintain the current normality, it should be recognized that the current “normal” is a function of factors present only in the past few decades.

    Like you are warned with each investment—past returns are not indicative of future returns.

    And like being named by as the “oldest living person”, being described as the “longest running economic expansion” should be taken as the direst of warnings, not a prediction of permanent status.

  23. sierra7 says:

    It’s apparent to this reader that the “financialization” side of our economy desperately needs some “Milk of Magnesia” to clean it out. Hopefully the FED will stand it’s ground and continue the incremental interest rate hikes. With each small one a bit more “garbage” will be wrung out of the system. Let the “investor” (Plundering, speculative) class scream bloody murder. Let them line up for the “Castor Oil” that this system needs. And, keep from our ears some bald headed fraudster from pleading before Congress that “….they were doing God’s works!”

  24. The argument makes sense if bankruptcy is allowed to proceed on a case by case basis, or we will resolve the issue with one omnibus (FED) policy (bailout). The result of the 2008 crisis resolution was to lift the share price of those companies with the most debt. The worst will be first again only if the Fed feels empowered by their results from the handling of the previous crisis (seems likely). The shrinking of global credit should make credit more dear, and cause an upward repricing in the market. Hence rates come down, (they are) and those holding impaired debt get a lift. Lower rates imply a greater degree of overall solvency.

  25. Bobber says:

    There is too much debt throughout the economy right now. This includes consumer, corporate, and government debt. The debt can be worked out through a limited set of alternatives including interest rate suppression, write-offs, inflation, and fiscal tightening (austerity).

    My guess is there will be a combination of these measures employed. The powers that be will attempt to limit the write-offs, as this destroys their wealth. Like Wolf says, however, there will be some bankruptcies of a few weak enterprises.

    Central bankers will most likely pursue a plan of modest tightening, which means interest rates will be held just below the neutral rate and inflation will be allowed to run higher than normal. They will try to keep asset prices at a relatively high level. Real returns on interest bearing instruments will remain low. Returns on stocks and RE will remain low.

    This will not solve our problems though. This is a form of “kick the can”. At continued 1-2% GDP growth, the government deficits will keep growing. The modest tightening will at best defer the pain for a few more years until the pensions become due and enough debts need to be refinanced at higher rates.

    In the long run, some debt holders and pension holders will simply not capture the benefits the system is currently promising them. I assume you could prove this out with a projection based on reasonable economic assumptions. It’s simple math. Nobody wants to do that though. We currently want to live under false assumptions like “tax cuts pay for themselves” and “it always works out in the end”.

    At current debt levels, returns on stocks, bonds, and RE gets suppressed, and this creates all sorts of problems long term. A deep recession is the only real solution.

  26. Bet says:

    It’s about time that the candy dish of moral hazard is taken away. The 20% that the pundits use to say a bear market is in force is a joke, this time.
    The markets were way too parabolic. 20% is a dip. The acid test will be on a move back to 2017 levels, do they hold, or will that be the level in which the markets climbs again, which actually when that rally is done IF it happens will be way , way, way ,worse than having a full correction of 40% to 50% now. A rally like that holds out the most deadly bait……hope….

  27. medialAxis says:

    What the plebs at the bottom of the pyramid (the guys in the real economy, the true creators of wealth, which actually keeps the financial sector going) are learning is the money they are paid in is not a good store of value, especially in the long term. Those that are careful with their money (small time savers who don’t do stocks and shares), have spent the last 10 years trying to find somewhere they can put their cash so as it will lose the least possible. They no long expect it to earn interest above inflation, they can only mitigate losses[1]. This is likely to go on for at least another 10 years, IMO. As I see it, central banks look after the banks, they are not that bothered about those at the bottom. I’m not so sure that’s wise, especially after the likes of Brexit, Trump, the yellow vests etc. Black swans[2] don’t come over that part of the horizon the main stream is scanning. It’s often 180 degrees the other way. It’s not to the future they should be looking (if only because their theories can’t reliably predict it any way) but to the past. After all, the universe is deterministic (at least to a very large degree[3]) and, while it’s difficult to gauge how populations will react even when you observe them, it’s impossible to do so if you ignore them. Assuming they’ll carry on as before creates an incubator for black swans. The next few of years will be interesting.

    [1] Some have upped their contributions to their pensions schemes, as that seems sensible. But how risky are pensions now, in the face of QE?

    [2] A term invented by main stream economists to “explain” why their theories are correct but unable to foresee the unexpected (you cannot make it up, at least not like economists can).

    [3] We can, in practice, ignore Schrodinger’s Cat, it’s nowhere near as destructive as a black swan.

  28. Iamafan says:

    Wow there’s a lot of chatter here. I hope they are from folks who put their money where their mouths are. Gotta have skin on the game.
    Wolf made several good points. Namely what will probably happen to stocks of highly indebted companies who default on their loans.

    Strangely enough the Fed itself loaded up on Treasuries and agency debt and can more or less be paid at par on maturity. I guess I’ll do what the Fed does. I want return of investment while the brave do something else. 2.6% return without losing principal is fine with me.

  29. Daxx says:

    Wolfe thanks for reintroducing the term and the basic value of the business cycle and of recessions.

    Contemporary socialist zeitgeist and the bi-coastal Illuminati are committed to the elimination of both these, ergo the ten year continuation and the profound suspensions to the theory of special relativity as they relate to monetary policy, if your a monetary GOD, you can give rise to alternate monetary reality.

    Hoping to see our CB GODs continue to leave and having a healthy shaking of the rust and domestic economic development which reduces middle class reliance on government support-participation.

  30. PaulJ says:

    As an Aussie entrepreneur, Alan Bond, once said, if you owe the bank $100K, you’re in trouble. If you owe the bank $100M, they’re in trouble. So, greed is good, if you’re the one doing the taking. Governments seem to always have to bail out the private sector from time to time, and directors are always happy for this to happen, so they do not have to dip into their own account to do so. Ultimately Directors are cowards.

  31. Kenny Logouts says:

    2007/8 was all about devaluing the debt.

    10yrs on and we’ve had *some* income inflation, a lot of asset inflation, and in relative terms the debts of 07/08 look small.

    Rinse repeat.

    As long as the proles get their token pay rises, token CPI/RPI message, they’re happy to see themselves getting poorer and poorer at the expense of the wealthy.

    For now any way.

    Eventually, even with lots of cheap debt, people will just stop buying almost everything.
    Once your majority consumers stop consuming your economy is screwed.

    I suppose this is why real world NIRP (“evil” rich people are only ones who lose out), and universal incomes will become a thing.

    Communism in the West!

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