Is the Corporate-Debt Bubble Ripe Yet?

What does it mean when the Fed and other central banks jointly bemoan the effects of their own policies? Worried about not being able to keep all the plates spinning?

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

The Federal Reserve, the ECB, the individual central banks of Eurozone countries, such as the Bundesbank and the Bank of France, the central banks of negative-interest-rate countries outside the Eurozone, such as in Switzerland and Sweden, they’re all now lamenting, bemoaning, and begroaning one of the consequences of low and negative interest rates, the ballooning record-breaking pile of business debts.

This is ironic because these outfits that are now lamenting, bemoaning, and begroaning the pileup of business debts are the ones that manipulated interest rates down via their radical and experimental monetary policies, thereby triggering the pileup of business debts.

This debt pileup isn’t an unintended consequence of their policies. It was one of the purposes of their policies.

But central banks also know from history that this historically high level of business debts is a powder keg waiting to explode – company by company at first, and then as contagion spreads, all at once.

The Fed is a superb example. In its most recent “Financial Stability Report,” released in November, the Fed warns about the historic record-breaking pileup of business debts in the US, as a consequence of low interest rates, and it considers this business debt the biggest risk to financial stability in the US.

But this warning came after the Fed had just cut its policy interest rates three times, and after it had begun to bail out the repo market with over $200 billion so far, and after it had begun buying $60 billion a month in T-bills, in total printing over $300 billion in less than three months, to repress short term rates in the repo market and to bail out its crybaby-cronies on Wall Street – and not necessarily banks – that had become hooked on these low interest rates.

In its Financial Stability Report, the Fed warns about the ballooning debts of non-financial businesses. These are businesses that are not lenders. Excluding lenders from the tally prevents double counting of debts, since lenders borrow money to lend money. So this is money that non-financial companies owe, and they range from mom-and-pop restaurants to Apple.

The Fed measures this debt in several ways. In absolute dollars, these debts have skyrocketed from record to record and have hit $18 trillion. And as a percent of GDP, these debts have reached historic highs. The Fed says that “the most rapid increases in debt are concentrated among the riskiest firms amid weak credit standards.”

So we’ve got historically high debt levels, especially among the most leveraged companies with negative cash flows, amid loosey-goosey underwriting standards.

And the Fed warns about, laments, and bemoans the speed of this debt pileup, with business debts jumping by 5.1% over the past 12 months, much faster than the economy grew.

The Fed warns that “excessive borrowing” leaves businesses “vulnerable to distress,” in which case they will need to “cut back in spending,” which means layoffs and lower spending on other stuff and cutting back on investments. This ricochets through the overall economy. And it comes with a decline in overvalued asset prices, and suddenly the collateral for those debts begins to vanish.

So the Fed says: “These vulnerabilities often interact with each other. For example, elevated valuation pressures” – meaning high asset prices – “tend to be associated with excessive borrowing because both borrowers and lenders are more willing to accept higher degrees of risk and leverage when asset prices are appreciating rapidly. The associated debt and leverage, in turn, make the risk of outsized declines in asset prices more likely and more damaging.”

In terms of high asset prices, the Fed puts commercial real estate at the top of its list, after massive price increases over the past seven years due to low interest rates. But rents on commercial properties have risen more slowly, and as a result, the Fed says, “capitalization rates, which measure annual rental income relative to prices for recently transacted commercial properties, have moved down over the past decade and are at historically low levels.”

The Fed laments not only the high quantity of debt, but also its lousy quality.

In addition to the $2.4 trillion in junk-rated bonds and loans, about half of investment-grade debt outstanding is currently rated triple-B, the lowest category of investment-grade. This is “near an all-time high,” groans the Fed.

And it warns that in an economic downturn, widespread downgrades of bonds to junk, could “lead investors to sell the downgraded bonds rapidly, increasing market illiquidity and downward price pressures in a segment of the corporate bond market known already to exhibit relatively low liquidity.”

And the Fed warns that a broad indicator of corporate leverage – the ratio of debt to assets for publicly traded non-financial companies – is at its highest level in 20 years. OK, 20 years ago was the end of 1999, just months before a phenomenal stock-market crash began.

Other central banks have chimed in, warning about record business indebtedness in their country, and about other fallout from their negative-interest-rate policies, just after having pushed interest rates further into the negative.

While this is clearly a case of central-bank doublespeak, it’s also a case of central banks getting worried about the effects of their handiwork that could end in a crisis at the business level that would hit the financial system, with not-hard-to-imagine consequences for the real economy.

The German Bundesbank laments in its Financial Stability Report that the “risks to financial stability have continued to build up in Germany.” If the current economic slowdown in Germany, now close to a recession despite negative interest rates, turns into an actual downturn, the Bundesbank says, it could trigger a “deterioration in the debt sustainability of enterprises and households,” which in turn could trigger waves of defaults and credit write-downs. This would hit German banks.

These banks, the Bundesbank says, have significantly expanded their lending to “relatively high-risk businesses” while reducing their loan-loss provisions. And the report says, “that banks’ lending portfolios now include a higher share of enterprises whose credit ratings could deteriorate the most in the event of an economic downturn.”

In addition, housing bubbles have sprung up in Germany. The Bundesbank considers home prices in many cities to be overvalued by 15% to 30%. German banks are heavily exposed to these housing bubbles.

The Bundesbank notes that low interest rates not only help mask the deterioration of Germany’s macroeconomic situation, they provide ideal conditions for the financial vulnerabilities to grow further.

The ECB’s own Financial Stability Review warned, lamented, and bemoaned that “very low interest rates,” and the search for yield among investors and “signs of excessive financial risk-taking,” are leading to “higher leverage among riskier firms,” and these companies are more likely to get downgraded during downturns, and this downgrade risk has increased “in view of a deteriorating economic outlook, indicating higher funding costs and possible rollover risks going forward, primarily for the very large lower-rated investment-grade segment” – so this is the very large pile of near-junk-rated debt that would be downgraded to junk. This “could exacerbate potential losses,” the report says.

And the Bank of France warned about, lamented, bemoaned, and begroaned the huge debt levels of large French non-financial corporations, many of them part- or majority-owned by the state. They have been using the era of negative interest rates and ECB corporate bond purchases to take on debt, not to invest in France and move the economy forward, but mostly to acquire other companies, many of them overseas.

The Bank of France points out that “the burden of this debt will have to be covered by the future revenues released from these acquisitions.” And it says, there is a risk that “anticipated future revenues may be overvalued.”

In the US, in Europe, in China for crying out loud, or anywhere, these business debts don’t go away on their own. They only go away in a debt restructuring or bankruptcy – at a big cost for lenders and investors or taxpayers.

Many of these debts were incurred to fund share buybacks, and to fund acquisitions that don’t produce cash flows for the acquiring company, and to fund cash-burning operations. And these debts just balloon and they need to be refinanced when they come due, and interest payments need to be made. And central banks are getting nervous about the effects of their own policies.

So their lamentations and warnings could be just more central-bank CYA – and later they could say to these companies and the public, we told you so, you shouldn’t have borrowed so much, and now look what kind of mess you’ve made.

Or their lamentations and warnings could mean that they’re going to let inflation run hot, to burn through this debt. But one entity’s debt is another entity’s asset. And in this scenario, everyone who holds these assets – pension funds, social security systems, retail investors, bond funds, banks, and the like – will see the purchasing power of their assets get crushed.

Normally you’d expect inflation to be priced into debt, but central banks manipulate the credit markets with an iron fist, and if rates spike in an effort at price discovery – such as in the repo market – the central banks step in with all their might and push those rates back down. So current interest rates neither reflect current inflation rates nor future inflation risk. Nothing is priced in.

Or their lamentations and moans and groans about debt levels could mean that central banks are struggling with a change of mind. The central bank of Sweden has already indicated that it would exit its negative-interest-rate policies soon. There is considerable jabbering among ECB officials that QE and negative interest rates would need to end. Draghi is gone, and there is now a reevaluation of monetary policy going on at the ECB. All these warnings, lamentations, and moans and groans about corporate debt could be a sign for folks to get ready for the end the negative interest rate era in Europe.

Or their lamentations could be a mix of all these and other elements, as they’re struggling to figure out how to keep all the plates spinning.

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  84 comments for “Is the Corporate-Debt Bubble Ripe Yet?

  1. andy says:

    Market gave Aramco $2 Trillion valuation. They can now borrow another Trillion or two and buy lower 40% of SP500.

    • Nicko2 says:

      Consider the source, but Al Jazeera did a bit yesterday on how certain Saudi billionaires (the same group who were held up at the Ritz in Riyadh and shaken down by the Crown Prince) were basically forced to buy ARAMCO stock, presumably to prop it up.

      • Mike G says:

        The IPO was much smaller than originally planned and listed only in Riyadh to reduce disclosure requirements. It went from a big worldwide offering to basically strong-arming the local cronies to pony up for shares.

    • Cas127 says:


      That alleged 2 trill valuation actually raised, what, maybe 30 billion in real cash, you know – the kind of money that can actually be spent (absent some dumbass acquiree or lobotomized bank willing to take illiquid stock in a 98 pct gvt owned – monarchy class – company, previously nationalized).

      There was a reason intl buyers all passed and Aramco had to resort to a gunpoint IPO essentially funded by clawed back graft from corrupt insiders and fellow oligopolist governments.

      This IPO was a weird intl flop – considering that Aramco allegedly sits on hundreds of billions of barrels of low access cost crude (although actual Saudi output oddly grew very slowly over
      the last 35 yrs…even as Chinese demand nearly quadrupled oil prices from 2004 to 2014…ushering in fracking as a viable competitor…hmm).

      It is almost like a 2 pct float in a 98 pct monarchy owned gvt isn’t fully trusted to observe foreign shareholder primacy.

      • Lance Manly says:

        Their reserves are always the same, even though they pump billions of barrels per year and haven’t made major new discoveries.

    • mike says:

      We are living in “interesting times” as the old Chinese saying goes. Aramco is an amazing story for investors, like the subprime securities.

      Funny, because reportedly, solar power and other energy sources are becoming more cost efficient and likely to be able even to fuel base load power through energy storage soon. Also, if most oil reserves were taken out of the ground, huge areas of the world would go underwater, at least regularly during storm surges coinciding with high tides.

      Other areas, e.g., Saudi, would be uninhabitable due to intolerable temperatures. At some percentage of left over reserves, rational governments will prevent the exploitation of the remaining portions.

      Thus, I wonder how the Aramco investors expect to get most of their money back: it is not like Saudi can increase its production much. The same applies to all carbon fuel reserves.

      It is as if the corporate executives, Saudis, financiers, Chinese communists (getting US investors into their fraudulent companies/scams), and other crooks are trying to get a last hurrah before the party ends. E.g., the corporate executives have little by little gotten their companies into debt that cannot be rolled over in a bad economy, when a recession was foreseably going to happen sooner or later.

      I guess that they figure that as long as they get their bonuses, whatever happens later to the investors is their (the investors’) problem. Like communists in China, corporate executives have painted many of their organizations into corners from which they cannot get out.

      What will happen when the economy goes down? I just hope that what may happen will not be war, again: there is a ruthless, deceitful dictator, who does not care about human life, is imprisoning its hated minorities, is building up the armed forces of his nation, threatening his nation’s neighbors, and whose country is in desperate financial straights; he may resort to war to avoid losing power.

      This was the situation with Hitler in the 1930s; it is the situation with Xi now. When the world’s economies go down like dominos, what will be done by the powerful to preserve their power?

      (Ha, you probably thought I was talking about the orange one, but he is not a dictator, so far.)

  2. Bruce Sammut says:

    Negative interest rates in Germany.

    When one is paid to borrow, why not go all out?

    The central bankers are getting what they want: financial inflation to make their pals richer and richer.



    • Old-school says:

      Best I can tell the US economy nominal growth rate is about $900 billion per year and the US government debt growth rate is $1.3 trillion. The govt is borrowing roughly for free in real terms and spending it into the economy and we still can’t keep our head above water.

      The problem I believe is that total debt was the crack to grow the economy from 100% of GDP to 330% of GDP. It can’t grow much beyond that number before you just have to peg interest rates to zero and slowly eat your seed corn. Capitalism is basically neuteted at that point. Money is the means of keeping score but when you stop replacing the real capital that gets used up you are going to start going backwards in your standard of living.

    • mike says:

      I doubt that any regular citizens are being paid to borrow in Germany. I am certain that the financiers will not have their Fed enable negative interest rate loans to ordinary Americans. The beneficiaries of those negative interest rates are the financiers’ entities, which are actually paid to borrow by their central bank.

  3. timbers says:

    Reason, logic, and facts don’t seen to matter with the Fed or much else nowadays. So how about this:

    The Fed should announce a 0.50% rate increase today, and say there will more of these in 2020. They should why: They don’t like the President and they want to cause his defeat in 2020.

    The Fed should announce this on Twitter. Like everyone else.

    The Deep State/Blob/Swamp whatever you want to call it, will protect the Fed in jubilation, but they will need to be wary that his supporters own must of the guns in this country and act accordingly.

    • The president conducts economic policy, not the Fed. With no new fiscal spending and an expanding budget, deficit spending with repressed interest rates, implies that the policy of supporting the corporate bond market continues unabated since 2009. The Fed tried to normalize, without fiscal policy there was no support for that to happen. Powell has handled the situation brilliantly. He absolved himself (the Fed) of responsibility for the rate cuts, and did not implement REPO until there was a liquidity problem. Fed is currently monetizing at three levels, and he opened a near trillion dollar facility without a whimper from Congress. Responsibility at this moment is where it belongs and I would guess everyone is satisfied with their position.

      • Old-school says:

        Sometimes I think it is just the government’s dishonesty to get funded. When government needed money for civil war they promised to pay people that loaned them money in gold, but tried to switch them to paper only when war was won. Anyway from gold backed, to silver certificates, to a positive interest spread over inflation, to zirp, to Nirp or debt monetization with QE. When you spend too much and have the the power you can try to stiff your creditor. It’s always easier to use fancy terms, but messing with the money is governments standard operating procedure.

      • cb says:

        How do you have no new fiscal spending and an expanding budget?

      • timbers says:

        “Powell has handled the situation brilliantly…”


        You are say that masking the actions you describe, and pushing their costs/consequences elsewhere – like on to me as a saver, as brilliant?

        Think again.

    • Old-school says:

      I wonder if some research economist will use the last 20 years of data to definitively prove that money printing hurts society in the medium and long term.

  4. Bob Hoye says:

    Inflation in bond price has driven yields down.
    Perhaps reaching technical excesses.
    Bond prices in becoming vulnerable can go down. For Junk, a lot.
    As with previous post-bubble contractions, the plunge in prices is not due to a return of CPI “inflation”, but due to the inability to service the debt.
    Bond prices have been inordinately inflated.
    Junk bond prices will deflate.
    Such interest rates can soar, which has been one of the features of a post-bubble contraction.

  5. Nothing2CCChere says:

    Congressman French Hill (R-Arkansas): “I think the concern is that the New York Fed is not supporting the repo market. They are the repo market. I think that’s the challenge. And we don’t see the bank reserves that are more than adequate – billions more than needed, on JPMorgan, for example, $120 billion in daily cash held at the Fed on a $60 billion cash requirement, and yet they’re not entering that repo market.”

    • bebe rebozo says:

      Can’t say i follow French Hill or Fanny Hill. Great quote however. JP Morgan screams risk off. How much more clarity do you need ?

      • Cas127 says:


        “JP Morgan screams risk off”

        Yes, but it also screams of the corrupt perfection (and perfect corruption) of the Fed’s interest-on-reserves riskless arbitrage machine – why risk money or brain cells on actual loan underwriting (when history has shown you frequently suck at it, blowing yourself up) – when you, Mr. TBTF Bank, can get risklessly get paid by the Fed (which just prints the shit anyway) for holding hundreds of billions in idle funds – for which you pay depositors zero.

        All the corrupt insiders win – TBTF banks get risklessly paid to exploit seniors and safety-first depositors…and the DC political class scum use Fed money printing to zero out interest rates on the accumulated debt from the decades of their previous fiscal degeneracy.

        The only people who lose…is everybody else on the planet…especially those who put their life savings into rolls of Fed toilet paper masquerading as a store of value.

    • Petunia says:

      The question to ask the bankers is at what rate would they enter the repo market for each class of collateral. The answer would disclose the real prices for each class of collateral. But who wants to know that.

      • bebe rebozo says:

        Better still, ask Moody’s or Standard and Poor’s.

      • Cas127 says:


        My recollection is that pre-Fed-Fiddled repo rates spiked from 2 pct to 10 pct back in Sept – that is quite a loan price/risk perception reset.

        And repos are very short term loans…but has been very wisely said of bankruptcy/loan default…it happens slowly…then all at once. Repos are very short term…but *some* repo lender has to get burnt on the actual day of default when a long-decrepit borrower finally goes under.

        And 20 years of ZIRP has created an entire American financial ecosystem *filled* with doomed borrowers…cash flow negative, kept alive only by means of bigger rolled-over snowball loans at ever lower interest rates, courtesy of the furiously printing Fed.

        And *nobody* knows this better than the repo-lending TBTF banks. They are at the center, the semi-beating rotted heart of the Fed invented shitty-verse of crap credit-risks.

        The rates spiked either because they know that outside lending books are about to turn to shit…or that their internal lending books are about to turn to shit.

        Either way, bank capital must be conserved and it is just f-ing easier to take the Fed’s riskless arbitrage on idle funds than to go into the repo mkts at something lower than an absurd 10 pct for an ultra short term secured loan (think of the annualized rates on 10 pct repos! Think of how shitty the borrowers must be perceived to be!)

        • Bob in FL says:

          So the market is teeming with known unknowns like when the $5 T BBB bonds issued to buy back stock. Unlike the old fashioned raiders of yore who got into a company, leveraged the hell out of it, looted it and busted it, all this work are inside jobs. Buy back stock boost earnings, get huge bonuses and bail when it blows up. So keep powder dry for what? Buy SAGG now? Au? Crypto? buy an oz of Au and a pound of Pb a month, already but there must be some asset class that goes ballistic when this charade ends with a bang, not a whimper.

    • Gandalf says:

      The repo market freeze up is just another sign of the coming debt bomb explosion, just like the 3 month 10 year yield inversion in July, and the 2 year 10 year yield inversion in September.

      These are all signs of the collective judgement of the more sensible and astute investors and financiers of the world sensing increased risk to all this bad debt, pricing in that risk, and moving en mass to safer ground.

      By rescuing the repo market, by lowering the Fed fund rate three times to squash the yield inversions, the Fed is indeed treating these small burning embers, the beginnings of the next wildfire, by throwing wood at it – enough to cover them up temporarily, but also providing more fuel for an even bigger fire shortly

  6. mark says:

    Gotta love the Fed – The arsonist who started all the fires, now commentating on the effects of the fires.

    Next they’ll pose as the firefighters, and demand approval from all of their subjects for their struggles “to put the fires out”.

  7. Old Engineer says:

    This is what is known in technical terms as speaking out of both sides of your mouth. The lack of honesty here is apalling.

  8. unit472 says:

    Saw Jeff Gunlach on CNBC yesterday. He said his !Total Return Fund does not own ANY corporate bonds. If the ‘Bond King’ avoids corporate debt what does that tell you and just how liquid will those bonds be in a downturn?

  9. c1ue says:

    I attended a “venture panel year in review” meetup earlier this week.
    4 VCs representing a telco, an outsourcing firm, an AI VC investment fund and a bank that focuses on startups.
    Usual talk about this or that. Several times, it was mentioned that there is enormous “dry tinder” out there: $50B ready for investment.
    What was interesting was what was not said: does the WeWork debacle plus Uber and other IPO fails mean that the game has changed? That all this “dry tinder” is no longer, or at least less, interested in investing in companies that lose money hand over fist?
    And extending from that: will the much larger pile of dry tinder that has underpinned corporate stock buybacks also continue that game?

    • Petunia says:

      Curious, did they address the issue of compensation? If companies that don’t make money can’t IPO, the stock compensation given to employees is worth zero, won’t employees start asking for real salaries increasing the burn rate. Just asking.

    • Bart says:

      A lot of the VCs in the valley are forcing portfolio companies to take more money from them. No where else to put it. Likely that forced cash comes at aggressive valuation. In the past, it was greater fool theory, early investors always made out but even then, with a decent IPO, later investors also did ok. Another crack in the armor, VCs and PE have limited places to put capita and if / when they start to money back to their LPs (Pension Funds) the pension returns drop and the assumed rate of return goes with it, more pension payouts from principal and more pressure down road to juice returns from a smaller pile of money while pensioners continue to age and have increased medical needs.

  10. Dillinger says:

    The Fed warns that because of its policies it might be forced to print (electronically) Trillions of dollars and hand them out to rich people. The Fed will then say that they are shocked, absolutely shocked, that it has come to this.

  11. Wisdom Seeker says:

    It doesn’t matter if the European and US Central Banks are unhappy with ZIRP/NIRP. They have no real choice, being locked into the global game of Credit Chicken with Japan, which is addicted to ZIRP, and China which is one prick away from an epic credit-bubble deflation. And they are also constrained by domestic forces – European economy is addicted to NIRP already. The US Fed tried to turn away from the epic chicken crash with the rate hikes, but couldn’t go it alone.

    A healthy financial system would be able to sustain debt repayments through organic growth without requiring credit increases above the rate of GDP increase. The fact that we no longer live in such a world is telltale evidence that the “bezzle” (accumulated bad debt and unrecognized fraud) is historically huge (consistent with the increasingly visible corruption).

  12. Jdog says:

    How long before the working class figures out that the FED policy of creating near free money for the wealthy class, is an attack on them?

    I cannot see any outcome from this monetary policy except eventual economic collapse on the degree of the great depression.

    It would be different if this money was being put to work productively, but that is clearly not the case. It is simply being used to manipulate stock prices and mask low productivity and innovation.

    When you combine the massive corporate debt with the massive consumer debt, and pitiful savings rate, you have the ingredients for a mass depression.

    • Paulo says:


      Let me add to your 1st sentence, or try to. First of all, unless someone is part of the leisured 1%, all of us are part of the working class and must answer to someone even if it is just a loans officer covering business financing, or the bank manger him/her self. It matters not one whit what your collar colour might be, or what degree you obtained. My brother-in-law is a good example and I think the world of him. Stanford law, PhD…. and he argues the economy is strong. Polite to the nth degree, he argues the economy is doing well due to the Dow numbers and the employment stats. Until something goes spectacularly Boom, he will follow this reasoning all the way to the end.

      But my point is this. I think people are just tuning out these recent days. The news cycle is driving people crazy, and it is the behaviours of all leadership that seems to drive folks deeper into their silos. (I won’t get into politics here Mr Richter). But….. is the behaviours and news cycle a symptom or cause; or both? Regardless, a result is cynicism and tuning out. I have relatives that come home from work, and just stream entertainment. Information, be damned. They are quite uninformed and I am lately wondering if that might not wisdom in action? Sometimes I wish I could just bask in willful ignorance and not fret so much.

      I still believe the only hope to save our civilization is a massive massive downturn and wake up. The longer this goes on the less of anything there will be to salvage for many many families. It’s supposed to be sunny tomorrow so maybe by then I’ll think differently, but…..

      • Paulo says:

        News Cycle example:

        After I left WS comment section this is what I read on CNN.

        “New York (CNN Business)Stocks bounced higher on Thursday after President Donald Trump promised the United States was “very close to a big deal with China.”
        “They want it, and so do we,” Trump said in a tweet.
        The news fueled hopes that the trade spat between the world’s two largest economies won’t escalate further. The Dow (INDU) climbed more than 300 points at its best, before pulling back again. The index was up 0.4%, or 120 points after midday. The S&P 500 (SPX) and Nasdaq Composite (COMP) also came back from their initial highs, but were up 0.5% and 0.3%, respectively.
        The next round of US tariffs on Chinese imports is due to take effect on Sunday, December 15. American and Chinese negotiators are working to delay them, The Wall Street Journal reported earlier this week. “

      • GSH says:

        When things appear too depressing, I re-read history. E.g. SPQR if you enjoy Roman history. But pick any time period: endless mayhem and financial insanity are par for the course. Suddenly, I realize again that today might be as good as it gets.

      • Jdog says:

        Your brother in law leaves one important factor out of his equation, and that is debt.
        We live in a debt based economy. The entire economy is based on borrowed money. This creates a debt cycle, as people can only borrow a finite amount of money before they reach a point where they can no longer service their debts.
        This cycle is typically about 10 years, and we are now past due for the correction. We are seeing the beginnings of the end though as sub prime debt delinquencies and default are steadily rising. Sub prime is the canary in the coal mine. The FED knows this and is now taking desperate measures to delay the inevitable.

    • ThePetabyte says:

      For those of us in the working class who have figured it out, I am hitting them where it hurts and taking money out of the banks. What good is it keeping your money in a place making half a percent of interest?

    • Just Some Random Guy says:

      The working class would be better off with 10% mortgages (like in the good old days) instead of 3.5% mortgages? Do tell….

      • Wolf Richter says:

        In SF, it would be better off with being able to buy a $250K house instead of paying $1.5MM for the same house.

        • Cas127 says:


          Note too how the allegedly neutral government also profits mightily from idiotic home price inflation.

          Even in Prop 13 CA, wealth (er, property) taxes are directly linked to home valuations – home price increases translate into higher annual property taxes – which don’t get refunded when the bubbles burst.

          Also – note how property taxes are on alleged home value – versus equity. That is worse than a wealth tax – homeowners are paying taxes on money they have *borrowed*.

          Also, note how the Fed ripoff of ZIRP hugely lowers or eliminates the annual consequence of accumulated Fed Debts – even as it pumps jet fuel into housing markets – hugely goosing local property taxes.

          Golly, it is almost like our government leadershit has intentionally constructed a sub rosa interlocking system designed to convert private income/savings to their use.

          Of which a fraction is returned to the actual earners, in the form of government “gifts”.

    • Bob in FL says:

      JD, that’s the Epiphany I had when I see how popular the Free $#!t candidates are. Joe and Susie and They Sixpack saw Jaime Diamond, Blankfein and all the TBTJail bankers go unpunished/bailed out last crash, what ONE person, a foreign national went to jail? They want their debt Jubilee it’s even in the Bible. Free college, free medicine. Burn. It. All. Down. Dick Fuld walked with $500 million when Shearson collapsed. Just sayin’…

  13. Iapetus says:

    Total U.S. corporate debt has grown 88% from $4.9 trillion outstanding in 2006, to nearly $9.2 trillion in 2018.

    Little of this new debt was put to productive use. Instead much of it was spent on unproductive strategies including stock buybacks, leveraged buyouts, and investments in cash-flow negative companies which have rarely ever been profitable (see tech unicorns and shale oil producers). Share repurchases or buybacks can spend a lot of money to temporarily push up a companies short term stock price, but this strategy contributes nothing to the companies revenues, profitability, future productivity, or new product development. Leveraged buyouts are known to overload a companies balance sheet with debts that can be difficult to sustain even for healthy firms. A cash-flow negative company doesn’t sell enough product to finance its daily operations, and therefore requires a constant inflow of outside capital to keep its business afloat.

    Investments in cash-flow negative companies mirror, in many ways, the worst mistakes we made during the Financial Crisis of 2007 – 2008. During that last financial crisis, massive losses were created when investors poured imprudent and highly leveraged sums into mortgage backed securities that were filled with questionable consumer loans. These consumer loans were called ‘subprime’, and many were questionable because underwriting deteriorated to the degree that many borrowers had No Income, No Job, and No Assets (colloquially called “NINJA” loans).

    The current situation in our markets is imprudent and highly leveraged sums have now been poured into questionable cash-flow negative corporate investments. These corporate investments include leveraged loans, high yield bonds, and their related equity. Many of these investments are questionable because the corporations backing them have Negative Income with no path to profitability, No Governance, and (almost) no Physical Assets to liquidate in bankruptcy (what you could colloquially call “NINGPA” investments). This is essentially the same greater fools game that was played with housing prices before the 2007 crash.

    It might seem like I’m stating the obvious but any company that constantly generates massive losses, and has virtually no assets will not be able to pay back its investors.

  14. gorbachev says:

    i would helpful to know which major co.

    would be harmed if rates went up 2%.I know

    a fellow in RE that if rates went up 1% his goose was cooked.

    He did sell and got out of it but he did say it was hard to

    turn down the easy money when was offered to him.

    • Cas127 says:


      “would helpful to know which major co.
      would be harmed if rates went up 2 pct”

      The answer is…all of them.

      Look at Q4 2018 20 pct sell off – resulting from Fed increase from 2 pct to 3 pct.

  15. That clears up a lot. Like what the heck is Fed talking about a 3% benchmark when CPI is nearly half that? He did mention wrapping up REPO around the first of the year. Just let it inflate Jerome. Assume FB anticipated future revenues are “overstated” not “overvalued”? Does Germany have an affordable housing crisis, how do they deal with it? Here in America we just build more houses and pretend they are affordable.

  16. Brant Lee says:

    It seems obvious now that the high management of corporations are using their companies to line their own pockets first, come heck or high water. If things don’t work out down the road, profits and employees suffer, but dude is forced to retire…dirty rich.

  17. Old-school says:

    Have capital one card that I use two times a year to pay a 6 month bill. Just received capital one offer 0% transfer, 2% fee. Miss a payment it’s 16.9%. If they really knew my business they would know I have nothing to transfer.

    Still some cheap money out there for credit worthy.

    • Just Some Random Guy says:

      You don’t need to literally transfer the money to another card. If it’s anything like the offers I get, you can use the money as cash. Discover offered me 0% for 18 months with no fees recently. I jumped all over it.

      And I thank the suckers paying 16.9% (or higher) who subsidized me.

  18. Sara Racano says:

    Just for the record, what are you actually saying, Wolf?????? You stated in the summer that 2008, was a one off event that would not happen again, now it looks as though you have done 100 degree reverse turn.

    What this paper suggests to me is huge deflation on the way, you can print as much money as you want but it will not stop deflation.

    Negative % rates, what better incentive there is to own physical gold

    • Frederick says:

      Sara I totally agree and own gold and plan to ad to that very soon The dollars goose is cooked IMO

  19. Otishertz says:

    People say that the fed will run out of monetary policy tools at lower bound interest rates but couldn’t they also use capital destruction via a managed crash in overpriced stocks to create a reverse wealth effect that similarly removes money and previous QE from the system without raising fed funds rates?

    • Cas127 says:


      “managed crash in overpriced stocks to create a reverse wealth effect”

      Yes, but it would have to be triggered by something…like a rate hike (or maybe Fed equity sales if it has been secretly and illegally buying stocks since 2009)

      “that similarly removes money and previous QE from the system without raising fed funds rates?”

      That I am not so sure about – the Fed pumping money into fractional reserve lending banks is special – since banks lend on to others with only fractional reserves, there is a multiplier effect on the money supply – that is why Fed lending to banks is called high-powered money.

      A stock crash would not have this multiplier effect on the money supply draining side.

      The Fed’s insanely goosed money supply has gone all sorts of stupid and insidery places – the 40 pct overvalued stock market, the 50 pct overvalued coastal housing mkts, and, most insidery – the hundreds of billions in idled bank reserves among the big rotten 4 – who now get absolutely safe interest from the Fed for doing nothing with their idled bank reserves (a secret, decade long TBTF Bank recapitalization tool?)

      A stock mkt crash would only drain a part of the QE.

      Now maybe illegally seizing those banks’ illegally granted idle reserves…that might have a draining effect.

  20. Memento mori says:

    The Fed just announced that they will grow their balance sheet by 365billions by January 14th.
    The balance sheet will be higher than ever, so much for the quantitative tightening.

    One question comes to my mind, why isn’t mainstream media reporting on this?

    I also noticed yesterday during Powell’s press conference that all questions asked were lame and about useless technicalities, no one seems to be looking at the big picture of what the Fed is doing.p or asking tough questions.

    • Wolf Richter says:

      “… will grow their balance sheet by 365billions by January 14th.”

      That’s not at all what they’re saying. At least read the directive you linked. The $150 billion is overnight repos over New Year’s to deal with year-end liquidity crunch. Then these overnight repos unwind the next day. By Jan 14 most of this stuff will have unwound.

      • Cas127 says:


        Thanks for the clarification – a lot of media sources are reporting on the Fed’s ongoing repo intervention as if the Fed’s repo loans just keep stacking up – as opposed to getting paid off, and then re-lent.

        On the other hand, the stated increase in the Fed’s balance sheet would seem to indicate that the extent of Fed lending *is* cumulating – otherwise why is the balance sheet growing?

        Is it just that the Fed is taking over a higher and higher percentage of short term repo loans – as opposed to holding loans longer and therefore stacking them up?

        The general press does not do a good job on reporting this.

        • Wolf Richter says:

          Repos on the Fed’s balance sheet, all repos combined, are now at $213 billion as of the balance sheet for the period ended Dec 11, below where they were six weeks ago:

          The Fed is also buying T-bills under a separate program that go into a different account. And it is buying quite a few of those T-bills. You can get more info on this and the repos and MBS here:

          The phrase “… will grow their balance sheet by 365billions by January 14th” means that the Fed would add $365 billion to its balance sheet from where it is now. That’s just nonsense.

          For example, the $150 billion overnight repo limit that is new replaces the $120 billion repo limit. So the additional repo limit is just $30 billion – assuming it is fully subscribed. Overnight repos have been undersubscribed recently.

  21. Jeff Relf says:

    The world is drunk on cheap oil.

  22. Iamafan says:

    Now that the Fed brought out a bigger bazooka for the repo and phase 1 trade deal supposedly agreed upon, there’s nothing to worry about for the holidays. You know term repo nowadays are below 1.55% already. Mission Accomplished. Next please.

    • Cas127 says:


      “You know term repo nowadays are below 1.55% already.”

      Not sure if this is snark – the Fed is lending into the repo mkt at 1.55 (banks wanted 10 pct during the worst of it)…and the Fed is granted the very magic political superpower of being able to pull money out of its ass (expropriating savers) so NY Fed honey badger don’t give a shit if their loans tank – they’ll just print more.

      Private lenders – whose own money is at risk and so incentivized to pull their head out of their ass – somewhat – wanted 10 pct to loan at one pt.

      And if things have really gotten better, why does the Fed continue to have to intervene?

      • Cas127 says:


        Been thinking about it…since Honey Badger has had to stay in the repo mkt…I wonder if that provides a clue as to whether borrowers’ or lenders’ assets are perceived to be about to turn to crap.

        If borrowers were the problem…wouldn’t have some major implosions already have happened or at least word have leaked out-there are a shit-ton of borrowers and could a market moving majority of them all be on the brink at the same time? Without some word leaking out?

        On the other hand, the lending side of the repo mkt (as both primary lenders and intermediaries) appears to be very, very concentrated.

        Which maybe suggests that the length of the repo crisis indicates the problem is on the lending side – with one of the TBTF banks…who know that their internal loan book is about to turn to shit and therefore are conserving capital and not lending it out into the repo mkt, except at absurd rates.

        Since the lending side is so concentrated, one or two TBTFs hitting the outhouse *would* dislocate the repo mkt – and fewer players (and Fed muscle) would make it easier to keep the truth from leaking.

        • Nat says:

          “If borrowers were the problem…wouldn’t have some major implosions already have happened or at least word have leaked out-there are a shit-ton of borrowers and could a market moving majority of them all be on the brink at the same time?”

          Maybe, but the beauty of REPO is defaults are just “shruged” at, and from what I understand the FED won’t tell us who is defaulting on potentially billions worth of REPO right now until fall 2021

      • Iamafan says:

        1.55% is what the Treasury pays me for a YEAR. Iamaloser.

        • ispanyol says:

          What is relationship between FED monetary policy and the amount of “BBB” bonds?

          Low interest rates creates more BBB bonds and more downgrade bonds ? How?

  23. Exhausted in San Diego says:

    You know, I have been reading about this stuff for over 10 years now, about the state of the economy, crazy lending, crazy finance. Seems like I’ve read a million articles that the end is nigh. That this will happen, or that. That a reckoning is coming and something must be done, nothing can be done, we can’t keep doing the same thing. Warnings, lamentations. But I have, personally, now reached a state of exhaustion. I can no longer read this. Nothing EVER seems to actually happen. The can gets kicked further down the road and somebody new makes yet another warning that, for reals this time, the shyte is gonna hit the fan, I SWEAR. Wake me up when something happens. Because they’ll just print more money, the stock market will go higher, the rich will get rich. I just can’t buy into this.
    anymore. Sorry. Nothing ever ACTUALLY happens, anymore than anything ever ACTUALLY happens on a soap opera.

    • Wolf Richter says:

      It’s an economy. It’s not a Clint Eastwood movie.

    • Willy Winky says:

      I am with you. By all rights this sucker should have sunk years ago.

      But the central banks have said they will do whatever it takes and they have demonstrated that they will do absolutely anything to try to delay the ship from sinking to the bottom

      Of course they will at some point fail.

      The insanity we are seeing would make for a good Monty Python episode, except that when it does fail we are going to witness suffering on a scale beyond anything in the history of the human species

      • Exhausted in San Diego says:

        “Of course they will at some point fail.” LOL. That’s my WHOLE point. This sort of language, that the sucker is GOING DOWN, has been going on now for OVER 10 years. But nothing ever happens. How do we know they have not figured out how to rig a perpetual money machine. Because going against this market has killed a million bears and will it ever stop? It’s a fair question, in my mind. I know, the turkey thinks it’s the favored animal on the farm. Til Thanksgiving. But still, ‘They’ seem to have an infinite number of tricks up their sleeve.

        And, no Mr. Wolf, it’s not a Clint Eastwood movie. Those have plots. This is just a mess of egregious excess piled upon monotonous gluttony heaped over a slathering of deceit and duplicity that all rests on the bones of the common people. At least that’s my opinion.

    • Cas127 says:

      E in SD,

      “Wake me up when something happens. ”

      1) There is a lot of ruin in a country…or a currency.

      2) Something *has* happened…you have just been numbed to it.

      ZIRP (used to save our corrupt gvt from the consequences of its actions) has essentially taxed away 75 pct of the earning power (8 pct T rates pre 2000, 2 pct T rates post 2000) of all accumulated dollar savings in the entire world…without a single public vote ever being taken.

      And almost all fixed income investments are priced to a spread against “safe” Treasuries – so the entire return structure of borrowing/lending has been dramatically altered for 20 years.

      Which in turn has dramatically warped the housing mkts on the coasts (int rates down, PV up – finance 101) and tremendously distorted the equity mkts (that is why we are at a brittle 25 PE instead of a historically normal 15…and why a teeny 1 pct rate hike nearly killed the stock mkt 1 yr ago – 20 pct losses in 3 mts).

      That is the consequence of incredibly bad gvt policies – and they have conned you into thinking that “nothing has happened”.

    • Lisa_Hooker says:

      Don’t worry.
      No amount of money can buy happiness.
      Enough money can rent it.
      – Lisa Hooker

  24. HYG, high yield bond market is on a tear. Just what is the catalyst that will bring this market down? Many analysts are calling for an earnings recession? It seems likely that corporations will pay even less tax, based on lower revenue, than they do now, and government taxpayers, who are at record low unemployment, will have to make up the difference, even while consumer prices are rising (taxpayers pay their own wage hikes?) Corporations pass it on. I love corporate bonds more than I love my dog…

  25. David Hall says:

    US corporate debt/GDP ratio is about 50%. This is measured in the type of dollars I have in my checking account. The ratio is high by historic standards.

    There has been unusual short term activity in the commodities markets.


    Geithner met contagion with a ‘wall of money’ for 08, and explained in Panic 2018 that that is how the CB-ers deal with contagion. Powell & Mnuchin have formed a new Plunge Protection Team-PPT and the wall of money is poised to confront the expected contagion for year end.

    CB macro-mismanagement in terms of Geithner’s Too-Big-to-Fail going forward is clear in that Too-Big-to-Fail [JPMorgan Chase] pulled their REPO backstop for the shadow banks & non-bank sector hedge funds. Powell has to bail out Too-Big-to-Fail in 2019 overnight REPO & Daytime REPO operations because Geithner’s Too-Big-to-Fail banking system is in actuality failing as we write here.

    When the walls of money have to be brought out to provide gap stop measure we are all in for a world of undoing.

    The unwind of 08 is approaching IMHO. Nothing was fixed post-Lehman and here we are again only it’s far far worse this time round on debt & deficit.

    Keynes got us into this mess.


  27. Just Some Random Guy says:

    China deal announced. Conservatives win yuuge in UK.
    Dow 30K early 2020.

  28. cd says:

    Europe is toast, cyclical depression there is firmly in place….

    US is still the dominant winner across the world. FOMO will drive the SPX to 3400 next year, no banker will give Democrats a key to potus….In fact it might be the biggest landslide in history of presidential elections…

    What a great run this has been, so many R’s that my wife is going to get nice surprise…..

    all this fear and people in cash gotta to be hurting with this run up…..after inflows again hit highs near 3400…time to take a break somewhere warm…..

  29. Ole C G Olesen says:

    I surely appreciate your always FACTUAL reporting .. Wolf ! But i also think.. or better … ” feel” … that there is more to the picture than meets the eye. Wealth is relative . And in the end, only that has Value which can generate Profit and which the World can not do without. The ones holding those Assets , will be in the command seat .. regardless of their changing ..Valuations . There are several historical examples for Bargain acquisitions made possible by engineered crisis … for example the Take over after the Battle of Waterloo, the engineered take over of Corporate America in the 20-30ties .. and probably many more. I have a suspicion that such a PLAN is the REAL explanation for the current reckless and insane Money policies.. with Politicians participating, hoping to be inflated out of their Political Promises

  30. tommy runner says:

    ‘three months later..’ the problem w/ the repo mkt is the result of congress w/ the passage of hr 10, specifically by section 403 of the Economic Growth, Regulatory Relief, and Consumer Protection Act,the final rule is effective on July 5, 2019.(details and context in 6nov wolf street post ‘whats behind the fed’s bailout of the repo market’?) the ‘2014 liquidity coverage ratio rule’ (lcr) required banks to hold sufficient reserves for emergency called ‘high quality liquid assets’ (considered same as cash). the 2016 amendments to the 2014 lcr rule allowed municipal bonds to meet the (hqla) requirements, however only general obligation bonds tied to a tax income stream were accepted and even then only 5% of the total reserves could be held in these bonds (called a haircut) as opposed to riskier revenue bonds w/out the tax stream for repayment. it is these hqla that are used for the repo operations. section 403 ditched all of the well written protections (including the haircut) in the 2016 amendments so some bank(s) may have now filled their lcr basket w/ unattractive collateral while at the same time lowering the cash available to loan in the repo market. w/ banks unable to loan/accept this collateral the fed stepped in to finance these operations in sept, and this is where we are today. now the rest of the story here is that by the end of the year hr 10 in its entirety will have just about completely neutered dodd/frank. at this point by year end maybe the best the tax payer could hope for is that the fed continues to finance overnight repo operations, the banks are certainly pushing for much more..
    (btw Fh (ar) voted yes on hr 10 as well as hr 1044).

  31. andy says:

    Your mother always advised against borrow and spend.

    When government’s advise you to borrow and spend, believe your mother.

  32. Wes says:

    Well written and well said Mr. Richter. If I remember correctly, earlier this year, Mr. Powell called this the Triple B cliff. He and the FOMC know that if this debt drops just one notch that certain institutions holding it will have to sell it due to regulatory requirements. Not if, but when this occurs this debt will either sell off and reflect its actual risk value or the FOMC goes on another buying spree. They are betting everything on the re-inflation of assets to monetize the bubble that Federal Reserve built in years past.

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