Sunday , 25 September 2016


“Crexit” Is Upon Us – Caution is Warranted

“Crexit:” a credit crunch brought about by plunging bond prices, soaring losses, an implosion indollar bubbles 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. That’s what S&P’s debt analysis team fears is about to unfold with the acceleration in corporate debt and that tells me that caution is still warranted when it comes to your investing strategy.

The comments above and below are excerpts from an article by Mike Larson (MoneyAndMarkets.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.

S&P’s debt analysis team says corporate debt is exploding, on track to hit $75 trillion in the next four years from $51 trillion now as the result of $38 trillion in refinance volume and $24 trillion in fresh debt…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.

…[This] explosive growth in corporate debt…[is the result of the] 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.”

…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” –  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.

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, [however,] 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 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.

Disclosure: The above article has been edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.
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