S&P’s Debt Crisis Warning

Financial markets have rallied all week and gold and silver have come off a bit… the music machine is cranking up and there’s dancing on the (trading) floors.  That music machine is central bank stimulus, and post Brexit it’s time to double down and boogie.  It started with ‘Helicopter money’ hitting the mainstream vernacular, expectations of government intervention to the Euro banking crisis, tempering of basically any expectation of a US rate hike for some very considerable time, and imminent monetary easing/stimulus (not tightening) flagged from the ECB, BoE, BoJ, PBoC and our own RBA to name just a few central banks.  These guys are clearly flagging the easy money game will continue so go forth, borrow and buy shares and houses – we’ve got your back….  You don’t need that gold nonsense…

Coincidentally Standard & Poors Global Raters (yep, those S&P guys threatening to downgrade Australia’s AAA rating), have just released a damning report on the rampant corporate debt growth around the world.  Indeed they forecast global corporate debt to rise by 50% in just the 4 years to 2020 from an already eye-watering $51.4 trillion to $75 trillion.  The breakup is not wide spread either.  Of the $75 trillion, $62 trillion is completely new debt, with ‘only’ $13t financing. The 3 biggest economies making up over 82% alone!

  • China will add $28 trillion (45%)
  • US, $14 trillion (22%)
  • Europe $9 trillion (15%)

As we have written extensively about, they cite too the misuse of all this debt in that it hasn’t been used to purchase plant, equipment, or other capital expenditure underpinning future earnings, but rather to buy back shares and pay dividends to artificially prop up the share price.

Here are a few excerpts from their report:

“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.”

"nearly half of corporate debt issuers are estimated to be highly leveraged, strongly suggesting that a correction in global credit markets is unavoidable. In fact, analysts believe that the credit correction began in late 2015 and will likely stretch through the next few years as defaults spike."

“Indeed, the credit build-up has generated two key tail risks for global credit. Debt has piled up in China’s opaque and ever-expanding corporate sector and in U.S. leveraged finance [the share buying we mentioned above]. We expect the tail risks in these twin debt booms to persist.”

They even coin a new phrase, Crexit, which like the UK leaving the EU, we could see investors leaving all this debt (which we will discuss further tomorrow):

"A worst-case scenario would be a series of major negative surprises sparking a crisis of confidence around the globe. These unforeseen events could quickly destabilize the market, pushing investors and lenders to exit riskier positions (a ’crexit’ scenario). If mishandled, this could result in credit growth collapsing as it did during the global financial crisis.”

So by all means have a punt on the dance continuing and shares rallying.  But know this is an artificial set up that will end in tears.  That this is so obvious to so many is why both bonds and gold/silver have rallied so strongly beside the sharemarket rebound.  What this report highlights however, is you’d better pick those bonds carefully, and that the unavoidable crash is getting close.