Showing posts from September, 2020

The corporate debt bubble: CLOs and company bankruptcies

In addition to monetary and fiscal bubbles, another potential issue that could be exacerbated by a prolonged period of low interest rates are rising corporate debt levels of publicly listed nonfinancial companies. Total corporate debt of such companies has already reached historical highs by surpassing $10 trillion in Q1 2020, and is likely to keep growing in the months to come. Adding to this another 5.5 trillion of corporate debt from SMEs and other non-listed companies the total corporate debt size in the US is now at 73% of GDP. This is still lower than household debt in 2009 which reached almost 100% of GDP, and with lower rates of growth. However, corporate debt will keep on rising – as it did during the 2009 crisis – as a necessary consequence of the pandemic and increasing risk exposure of many companies.
Leveraged loan market and CLOs
About $1.4 trillion of that market (also at historical highs) is comprised of leveraged loans, which include all loans securitized in something c…

Monetary and fiscal bubbles after COVID

In the previous blog I analyzed the stunning divergence between the markets and the real economy. I emphasized three particular reasons for why this is happening: (1) huge monetary and fiscal stimuli that started the V-shaped rebound on the markets in March; (2) exuberant (and by all means irrational) expectations driven primarily by the so-called retail investors (the subject of one of my next blogs), and (3) the asymmetry between firms driving the market (the top 5 big tech firms) vs the unlisted SMEs laying people off and declaring bankruptcies. In this blog I will touch upon the potential instabilities of the first effect: the monetary and fiscal stimuli. While the stimuli were designed to calm the market panic back in March, its continuation - particularly from the Fed - is creating massive instabilities elsewhere. Specifically, there is ample evidence of a growing monetary bubble, unavoidable fiscal instabilities due to rising debts and deficits, and even a potential corporate d…