Corporate Debt Bubble

Fed drops the ball with systemic risk management. Keeps promoting financial asset bubbles to “help” economy, resulting in malinvestment and excess speculation. Since the last cycle peak in 2007, corporate debt has doubles from $3 trillion to $6 trillion. Yet sales and profits have only grown about 25-35%. That means leverage is a much bigger economic risk when we have the next recession. The Fed sees no financial imbalances. When the corporate debt bubble implodes in next downturn, the Fed will plead ignorance.

According to who?

This is WAY more complex than that statement.

  1. Coverage ratio is critical. 2015 S&P 500 earnings were $800B. $6T of debt even at 4% interest is ~30% of earnings which are post interest payments.
    2… Market cap of public US companies is $22T, so the debt/equity ratio is still very conservative.
  2. Lower rates have made debt finance much cheaper than equity financing. If rates go up, then companies will revert to equity financing.
  3. Low oil didn’t trigger massive defaults of corporate debt. I think if there was a bubble that would have been the needle to pop it, but we remained stable.
  4. A rapid rise in rates would be a bigger issue. Corporate debt tends to be shorter-term, and they pay it off by issuing new debt. If they end up retiring 2% debt to issue 6% debt, then that’s a huge issue.
  5. I’d watch HYG for signs of bond bubble or collapse. Bond traders are smart and will be out way before equity investors.

I’m far more concerned about the explosive growth in US government debt and debt in China. We don’t even realize how much debt their is in China, because so much of it as at the local level. Any loss of confidence that creates panic selling of bonds and a subsequent spike in yields would be catastrophic way beyond what we saw in 2008.

1 Like

Reflation likely to increase US government debt.

While I agree most of your statements, I do not really see a bubble or correction in next two years. FED applying rate hike is to normalize the bubble formation rather than to explode it like year 2008 !

It’s all about “the art of the deal”. :stuck_out_tongue_winking_eye:

Whatever happened to the muni bond bubble…Or all the other bubble rumors in the last ten years. …Fugetaboutit