Thanks to massive stimulus that the Fed can never seem to unwind despite promising to do so for years, the Corporate Bond Deluge Rolls and Leverage Soars to New Heights.
What has the analysts uneasy isn’t just the speed at which leverage is climbing, but that it’s happening while the economy continues to grow.
“Leverage tends to rise most in a recession — so the fact that it is this high in a ‘healthy economy’ is even more concerning,” the analysts wrote. In other words, they said, “mistakes are both more likely and more costly.”
Corporate-bond issuance this year is on pace to exceed last year’s record $1.3 trillion, data compiled by Bloomberg show. That would push sales during the past five years to more than $6 trillion. Companies that sold dollar bonds this week included Home Depot Inc., Cox Communications Inc. and TJX Cos.
Total debt at companies grew steadily at about 10 percent year-on-year since 2009 and accelerated to 16 percent year-on-year at the end of 2015. As that happened, Ebitda fell 4 percent for twelve months through the end of 2015, according to the report.
Debt loads are swelling across most all industries, the analysts said. But it’s been most pronounced among energy and healthcare companies. Companies have also borrowed to buyback stock rather than investing, a factor that contributed to weak productivity in the US economy, and that does not “bode well for earnings,” the analysts wrote.
Wizard of Fed
Speculation has it that Fed governor Lael Brainard, an interest rates dove, would signal she was ready for rate hikes in a speech today. Instead, I wrote, Strike Three on September Rate Hike: Brainard Urges “Prudence”.
Read Gary Shilling: Get Defensive
Prior to her speech, I was highly skeptical the Fed would hike. It’s now a near certainty the Fed won’t hike.
Cowardly Scarecrow
The Fed is like a talking statue that cannot think clearly or ever move. Envision a combination of the brainless scarecrow and the cowardly lion from the Wizard of Oz, stuck on a pointed stick, yapping incessantly but afraid to do anything.
