What I find most fascinating is how quickly many dismiss the issue of corporate debt with the simple assumption of “it’s not the subprime mortgage market.”
Correct, it’s not the subprime mortgage market. As I noted previously:
“Combined, there is about $1.15 trillion in outstanding U.S. leveraged loans (this is effectively “subprime” corporate debt) — a record that is double the level five years ago —
and, as noted, these loans increasingly are being made with less
protection for lenders and investors. Just to put this into some
context, the amount of sub-prime mortgages peaked slightly above $600
billion or about 50% less than the current leveraged loan market.”
Every bubble has its own characteristics. The current bubble
is no different, and I would suggest that it has the potential to have
more severe consequences than seen previously. The reasoning is that the fallout from the sub-prime directly impacted both lenders and the homeowners. This time a “corporate debt bust” will
impact a much broader spectrum of companies which will lead to a surge
in bankruptcies, mass job losses, and the subsequent contraction in
consumption.
Same effect. Different characteristics. 前回と同様のこと。しかし今回固有の性質。
Remember, in 2007, Ben Bernanke gave two speeches in which he made a critical assessment of the “sub-prime” mortgage market.
“At this juncture, however, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.” – Ben Bernanke, March 2008 “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the sub-prime sector on the broader housing market will likely be limited.” – Ben Bernanke, May 2007
「しかしながら、現時点では、サブプライム市場の問題が幅広く経済や金融市場に与える影響はすでに抑え込まれたように思える。」ーー Ben Bernake, March 2008
Of course, the sub-prime issue was not “contained,” and all it required was the right catalyst to effectively “burn the house down.” That
catalyst was Lehman Brothers which, when it declared bankruptcy, froze
the credit markets because buyers for debt evaporated and liquidity was
non-existent.
It was interesting to see Federal Reserve Chairman Jerome Powell,
during an address to the Fernandina Beach banking conference, channel
Ben Bernanke during his speech on corporate “sub-prime” debt (aka leverage loans.) FED議長 Jerome Powee のFernandina Beach 銀行会議での基調演説は興味深い、まるで彼のスピーチはBen Bernankeが憑依したようだった、企業「サブプライム」債務（レバレッジドローンと呼ばれる）について語ったときのものだ。
“Many commentators have observed with a sense of déjà vu the
buildup of risky business debt over the past few years. The acronyms
have changed a bit—”CLOs” (collateralized loan obligations) instead of
“CDOs” (collateralized debt obligations), for example—but once
again, we see a category of debt that is growing faster than the income
of the borrowers even as lenders loosen underwriting standards.Likewise,
much of the borrowing is financed opaquely, outside the banking system.
Many are asking whether these developments pose a new threat to
financial stability.
In public discussion of this issue, views seem to range from
“This is a rerun of the subprime mortgage crisis” to “Nothing to worry
about here.” At the moment, the truth is likely somewhere in the
middle. To preview my conclusions, as of now, business debt does
not present the kind of elevated risks to the stability of the
financial system that would lead to broad harm to households and
businesses should conditions deteriorate.” – Jerome Powell, May 2019
The reality is that the corporate debt issue is likely not contained. Here are some stats from our previous report on this issue:
現実には、企業債務は抑え込まれたとは思えない。この件に関する私どもの視点での統計だ：
“Currently, the same explosion in low-quality debt is happening in another corner of the US debt market as well. In just the last 10 years, the triple-B bond market has exploded from $686 billion to $2.5 trillion—an all-time high.
To put that in perspective, 50% of the investment-grade bond market now sits on the lowest rung of the quality ladder. And
there’s a reason BBB-rated debt is so plentiful. Ultra-low interest
rates have seduced companies to pile into the bond market and corporate
debt has surged to heights not seen since the global financial crisis.”
Let’s put that into context with the sub-prime crisis for a moment.
この状況をサブプライム危機の文脈で解釈してみよう。
As Michael Lebowitz wrote for our RIA PRO subscribers. (Try FREE for 30-days) Michael Lebowitzが私どものRIA PRO購読者向けに記事を書いた（３０日無料購読できる）。
“The graph shows the implied ratings of all BBB companies based
solely on the amount of leverage employed on their respective balance
sheets. Bear in mind, the rating agencies use several metrics and not
just leverage. The graph shows that 50% of BBB companies, based solely
on leverage, are at levels typically associated with lower rated
companies.”
“If 50% of BBB-rated bonds were to get downgraded, it would entail a shift of $1.30 trillion bonds to junk status. To
put that into perspective, the entire junk market today is less than
$1.25 trillion, and the sub-prime mortgage market that caused so many
problems in 2008 peaked at $1.30 trillion. Keep in mind, the
sub-prime mortgage crisis and the ensuing financial crisis was sparked
by investor concerns about defaults and resulting losses.
As mentioned, if only a quarter or even less of this amount were
downgraded we would still harbor grave concerns for corporate bond
prices, as the supply could not easily be absorbed by traditional buyers
of junk.”
Think about that for a moment. If all of a sudden there is a massive
slide in ratings quality, many institutions, pension, and mutual funds,
which are required to hold “investment grade” bonds will become forced sellers. If there are no “buyers,” you have a liquidity problem.
Let me just remind you that such an event will not happen in a
vacuum. It will occur coincident with a recessionary backdrop where
assets are being wholesale liquidated. Which is the problem with
Powell’s comments which are all predicated on just one thing – no recession.
“To preview my conclusions, as of now, business debt does not
present the kind of elevated risks to the stability of the financial
system that would lead to broad harm to households and businesses should conditions deteriorate. At the same time, the level of debt certainly could stress borrowers if the economy weakens.”
Jerome Powell is basing his risk assessment on the assumption of a “Goldilocks Economy” that will presumably persist indefinitely. In other words, “the only risk is a recession.” Jerome Powellのリスク管理の基礎は「Goldilocks Economy 適温経済」を仮定している、彼はこれがずっと続くとして議論している。言い換えると、「唯一のリスクは景気後退だ」ということだ。
Of course, Ben Bernanke’s mistaken assumption about “sub-prime” was also the belief in a “Goldilocks”scenario.
“We have spent a bit of time evaluating the financial
implications of the sub-prime issues, tried to assess the magnitude of
losses, and tried to determine how concentrated they are. There
is a sense that, although there is always a possibility for some kind of
disruption, the financial system will absorb the losses from the
sub-prime mortgage problems without serious problems.” – Ben Bernanke, May 2007
Of course, the risk of recession has risen markedly in recent months
and the resurgence of the trade war may be just enough to push the
economy over the edge. But importantly, as Michael noted above, the real risk is when the recession does come. That risk was also highlighted by TheStreet.com
“Joseph Otting, who heads the U.S. Office of the Comptroller of the Currency, said
in written testimony to the Senate Banking Committee that underwriting
standards have declined on these junky loans, meaning investors will
likely get less of their money back in the event of a default. That could spell big losses in an economic downturn, since many of the borrowers likely would suffer a sales decline.
Banks bear ‘indirect risk’ from the junk-lending frenzy because
they lend to companies and investors who buy the loans once they’re
made, according to Otting.
‘Although less transparent to the federal banking agencies, we
will continue to monitor nonbank leveraged lending activity and its
potential impacts to the extent possible,’ Otting said. The banks also lend to companies ‘that may have critical suppliers or vendors that are highly leveraged.’ Regulators and banking executives often use the delicate term ‘leveraged’ to describe a company that is highly indebted.”
“’There is no such thing as passive investing. While it is believed that ETF investors have become ‘passive,’ the reality is they have simply become ‘active’ investors in a different form. As the markets decline, there will be a slow realization ‘this decline’ is something more than a ‘buy the dip’ opportunity. As losses mount, the anxiety of those ‘losses’ mounts until individuals seek to ‘avert further loss’ by selling.”
However, that “liquidity” risk is magnified when it comes to
junk bonds because those instruments can be particularly illiquid and
thinly traded. This was recently noted by Evergreen Capital
“While it’s well known that flows into stock ETFs have gone
postal during this bull market, less top-of-mind is that the same thing
has happened with bond ETFs. Per the charts below, most of the
inflows have been into equity ETFs but corporate bond ETFs have
increased by 1000% over the past decade.
Moody’s has also observed that ETF investors ‘may be in for a shock during the next sustained market rout’. They
opine that this is especially the case with ETFs that hold
lightly-traded securities such as corporate bonds and loans. This could
lead to a potentially jarring collision between perceptions and reality.
ETF investors think they can get out of even junk bond and
sub-investment grade bank loan ETFs on a moment’s notice. To a point that’s true. If they hit the sell button at their on-line broker, they’ll be out instantly. But
if they do so during another period of mass liquidation, they’ll get a
horrible execution price. In my opinion, this is almost certain to
happen in the not too distant future, particularly given that corporate
bond volumes have contracted so dramatically in recent years. For
example, since 2014 junk bond trading volumes have vaporized by 80%.
Thus, the bond market is dangerously illiquid these days.
Unfortunately, while Jerome Powell may be currently channeling Ben
Bernanke to keep markets stabilized momentarily, the real risk is some
unforeseen exogenous event, such as Deutsche Bank going bankrupt, that triggers a global credit contagion.
The problem for the Fed is that they aren’t starting with a
$900 billion balance sheet but rather one over $4 Trillion. Fed funds
aren’t at 5% but rather 2.4%, and GDP is running at half the levels of
periods preceding previous recessions. In other words, when the
next recession comes, which will trigger not on a credit contagion but a
mean reverting correction in asset prices, the Fed will have very
little to work with.
“Pop quiz, hotshot. There’s a ‘corporate junk bond’ bomb
on a bus. Once the economy slides toward 0%, the bomb is armed. If
Deutsche Bank goes bust, it blows up. What do you do? What do you do?”
For our clients, we have already gotten off the bus. We have eliminated our credit risk, shortened our duration and moved substantially higher on the credit quality scale.
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