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Money and Markets: Investing Insights

Is “Crexit” the Next Crisis?

Mike Larson | Friday, July 22, 2016 at 7:30 am

Image

Forget Brexit. Fear “Crexit”! 

That’s the stark warning from a S&P Global Ratings report that caught my eye this week. S&P’s debt analysis team just said that …

• Corporate debt is exploding, on track to hit $75 trillion in the next four years from $51 trillion now.

• The surge … stemming from $38 trillion in refinance volume and $24 trillion in fresh debt … is $5 trillion more than S&P’s last projection.

• It’s coming even as the percentage of companies considered “highly leveraged” soars, and as previous borrowers are defaulting on their bonds at a rate we haven’t seen since the Great Recession. More than 100 companies reneged on their debts in 2016 so far, up 50% from a year ago and the most since 2009.

What’s behind the explosive growth in corporate debt?

What else? An explosion of easy-money policies around the world. In S&P’s words:

“Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy. In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy. This cannot continue indefinitely. An increasing proportion of companies are becoming highly leveraged, raising questions over their long-term debt sustainability, despite low interest rates supporting their ability to meet interest payments.”

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And what are the likely repercussions? While hopeful of an “orderly slowdown,” S&P warned that the biggest risk is that markets face a painful “Crexit.” The research firm defines that as a credit crunch brought about by plunging bond prices, soaring losses, an implosion in China’s high-risk debt markets, and a reversal of all the “yield chase” trades investors have flocked to in the last couple of years.

Are we heading to a credit bubble? Many experts are worried.

I’m not going to suggest major ratings agencies like S&P always get things right. Far from it. But they usually err by failing to consider outside-of-consensus scenarios, or by belatedly sounding an alarm on corporate or sovereign bond risk — long after those bonds have already tanked.

This time, they’re issuing a major warning at a time when riskier bond markets have been on fire. They’re also doing so at a time when Wall Street acceptance of yield chasing is at an all-time high.

I find that extremely interesting, especially because it jibes with my worries about the “Everything Bubbles” we’re confronting in a wide range of assets. The question, as always, is one of timing. The broad averages hit an all-time high this week, despite the concerns expressed by S&P. So some on Wall Street will argue there’s no reason to worry.

Me? I know we’re late in the credit cycle. We’re late in the economic cycle. And we’ve seen persistent, lower-grade tremors emerge in any number of markets since last summer. That tells me there’s more going on beneath the surface – and that caution is still warranted when it comes to your investing strategy.

Until next time,

Mike Larson

Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{ 29 comments }

Justin Friday, July 22, 2016 at 7:49 am

This is the poison pill that is preventing normalization of interest rates. We’re stuck in this rut indefinitely.

Stu Friday, July 22, 2016 at 8:08 am

I concur completely with the “everything bubble” concept. The most serious bubble , although, may be the federal debt along with the sovereign debt around the world. We might be able to absorb a collapse in any single sector but when nations fail, especially the U.S. , we have a disaster in the making. I fear we are a speeding train ignoring the “bridge out ahead” sign.

Howard Friday, July 22, 2016 at 8:12 am

Hi Mike

Those who forget their history are condemned to repeat it. I would ask two things. Remember 1929 and secondly who profited after it and how did they survive.

Jim Bandinelli Friday, July 22, 2016 at 8:14 am

There is a moral hazard shared between governments and business that seems to hold the fate of our so called civilized/industrial nations. Our path forward is never clear, unpredictable, and fraught with corruption from wrongdoers. I suspect a cleansing will eventually happen, but the party is far from over. The smoke and mirrors is so dense it is beyond comprehension for most to even begin to fathom. We are all occupied by the daily grind, and bursts of news events that change with the winds, and die just as quickly. We are truly are a nation founded by geniuses but run by idiots.

Mike S Friday, July 22, 2016 at 8:14 am

This will blow up like an atom bomb. The fall out will be unbelievable for years to the economy and individual investors

Sean Friday, July 22, 2016 at 8:48 am

That seems like an accounting issue. Most of these companies have lots of profit instead of reporting the millions in profit, some of that money needs to pay those bonds.

Heidi Friday, July 22, 2016 at 9:02 am

Mike wrote something I would like someone to expound upon: “Remember 1929 and secondly who profited after it and how did they survive.” I want to know more about “who profited and how did they survive” It seems to me that we were in very bad times but we did indeed survive. Unfortunately no one talks about the profiteers or the survivors so I don’t know about that side.

$1,000 goldâ„¢ Friday, July 22, 2016 at 10:32 am

in the late 1920s, some savvy investors went to cash, which held its value as assets deflated. when the bottom was in, they bought assets on the cheap and became wealthy as those assets re-inflated, much like what happen in the 2009 crash.

John Friday, July 22, 2016 at 6:26 pm

Just a comment about surviving a crisis with cash. I believe setting aside a proportion of reserves in cash is common sense. However, a number of countries are “encouraging” citizens into electronic cash in banks, presumably to track them for tax reasons. But government sanctioned confiscation is my fear. In Australia we are swapping our current notes with new tactile Braille ones, while the old will be progressively devalued. I can’t help but think that the real motive is to stop people stashing cash. However, imagine trying to withdraw large amounts of cash from the bank if there’s a crisis – forget it! Some solid gold in a safety deposit box might be a wise way to diversify.

Jo Friday, July 22, 2016 at 12:03 pm

Those in my family who survived the Great Depression were free of debt. Education helps, too.

Jim Friday, July 22, 2016 at 1:10 pm

Goldy is right. Those with minimal debt, any cash at all, and even minimal employment were able to survive and profit later. Jim

Michael Nwafor Friday, July 22, 2016 at 9:12 am

What do you expect from greedy bankers creating money out of thin air via indiscriminate printing while ignoring the capacity of borrowers to create true wealth and value? We live in a world of time and space but the greedy counterfeiters are yet to understand that there is a limit to how much value can be created within a time

Gordon Friday, July 22, 2016 at 9:47 am

I think the companies should issue perpetual bonds with a .000000005 interest rate. Like Wimpy said “Can I have a hamburger today I will pay you tomorrow.” Just when I think I have heard of everything governments trot out this new way of stealing from honest people Perpetual Bonds really? They are nothing but a gift to the government. Wake up people!!!

Chuck Burton Friday, July 22, 2016 at 9:52 am

If companies plan to survive the coming events, they had best be figuring how to pay off the debt they have built up, and how to do without. This means dodging the M&A debt market, cutting debt fueled expansion, even reducing dividends where necessary. The problem is that such moves might leave them as prey to companies that are not so fiscally conservative, and which may ultimately fail, themselves. We could even see well known brands disappearing in stores – unless they are bought up by other companies at fire-sale prices.

Gordon Friday, July 22, 2016 at 9:54 am

Mike I think you have hit the nail on the head Crexit is the next crisis possibly a black swan event. This whole Tsunami of debt is being held by back a few fingers stuck in the dike.

$1,000 goldâ„¢ Friday, July 22, 2016 at 10:15 am

we’ve never had a bond bubble before. this is our first one ever. bond funds were not invented until about 30-something years ago. at that time, interest rates were at an all-time high and we’ve been in a declined rate environment ever since, which has been favorable for bond funds. my best guess was that the bond would have popped by now, but i didn’t see negative rates coming and the bond bull continues. the experts say bubbles pop when you least expect it. i’ll leave it at that.

Ben Friday, July 22, 2016 at 10:22 am

Thanks for sounding the alarm about the next major financial crisis caused by counter productive Central Bank policies. They boost stock and bond prices, while creating a headwind for small business.

People living on fixed incomes are forced into investments that they don’t understand and which are completely unsuited for them.

CHRISTIAN KIRCHER Friday, July 22, 2016 at 11:01 am

Heidi is right; its important to investigate about how people survived the great depression.
How did some of them take profit on it as when there is a looser on the other hand there is a winner….

Ralph Proodian Friday, July 22, 2016 at 11:18 am

Waiting for events to unfold.

Francois Aerts Friday, July 22, 2016 at 12:31 pm

The Mother of All Bubbles is artificially being held back by the policy of Governments and Corporate Businesses worldwide, but there is a limit to everything. The bubble will finally burst, and we might be witnessing the End of Capitalism as it is conceived now. I personally believe that future economies shall be based on meeting REAL NEED instead of promoting ARTIFICIAL GREED. I’m afraid such a new approach to economy requires a brand new mindset and a number of Geniuses in Economic Sciences to bring this change about. We could however start this process already by upgrading real productive work in the current economic cycle, and by downgrading taxes on it. At the same time, we should heavily tax all speculative transactions which raise the prices of raw materials (including food) to unacceptable heights. It’s about time we return to the sound economic policies that were driven by real labour and common sense instead of greed.

Jim Friday, July 22, 2016 at 1:19 pm

What scares me about this scenario is that in the 1030’s most people knew how to take care of themselves. My grandparents had very little but had a nice garden and some cows, sheep, and chickens. They never missed a meal and learned to do without the non-essentials. My grandmother was stashing canned and jarred food in the basement till the day she died. I’m not sure the current populace is capable of that. Jim

$1,000 goldâ„¢ Friday, July 22, 2016 at 3:54 pm

i’ve had the same exact thoughts, jim. but this ain’t the 1930s. it’s not the same. nowaday, you’d need a paramilitary force to protect your garden.

Jimmy Coombs Friday, July 22, 2016 at 2:48 pm

How do I as a investor make money on these corp defaults? Thanks and God Bless.Jimmy Coombs

jancey Friday, July 22, 2016 at 3:22 pm

In Australia Sydney nearly every house in the suburbs are a million dollars, I don’t know how young couples will payback the debt unless they have their families all paying the debt back to the banks

kinco Saturday, July 23, 2016 at 11:55 am

The crisis will take place on Trump’s watch and will cost him a 2nd term. (my guess)
I guarantee it won’t come before the election!

Vinman Saturday, July 23, 2016 at 7:23 pm

Maybe not FDR elected four times during the depression

Alexander Alekhine Sunday, August 28, 2016 at 12:32 am

“The crisis will take place on Trump’s watch and will cost him a 2nd term. (my guess)”

HAHAHA! Trump’s watch? The only watch Trump will have is his Rolex! Which is probably not even a real Rolex but a knock-off (my guess).

Edward Dostillio Saturday, July 23, 2016 at 1:13 pm

The easy money that is given to corporations via these junk bond offerings is also driving the stock market higher as many companies finance their stock buybacks with this debt. It is disgusting how the rating agencies continue to rate some of this debt as investment grade. A perfect example is AZO. They continue to borrow money to buy back shares which has driven their market cap to an astounding 23 Billion $ market cap while its balance sheet has NEGATIVE 2 Billion in tangible book value. They have very little cash and receivables, while their accounts payable are greater then their inventory. If any kind of credit crunch does come … watch out below!!!!

None of this is rational, but like any ENRON situation … It will go higher until it emplodes

CLARENCE Saturday, July 30, 2016 at 12:52 pm

COMMON SENSE IS NOT COMMON. FEAR DEBT.

Previous post: Junk Bonds Are Hot, But Is the Tide Turning?

Next post: Should Investors Worry as Woes Mount in Sectors Like Chemicals, Industrials, and Aerospace?

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