The Perfect Storm (of the Coming Market Crisis)

The comments above & below is an edited and abridged synopsis of an article by Lance Roberts

American corporations are levered to the hilt with total corporate debt that has surged to $8.7 trillion—its highest level relative to US GDP (45%) since the The Perfect Storm (of the Coming Market Crisis) | BullionBuzzfinancial crisis. In the last 2 years, corporations have issued another $1 trillion of new debt, primarily for share buybacks to boost bottom line earnings per share.

This is why repatriation won’t lead to massive economic growth, wages or employment. Instead, it will go to share buybacks, dividends and executive compensation.

For the last 9 years, the Fed’s 0% interest rate policies have left investors chasing yield; corporations were glad to oblige. The end result: The risk premium for owning corporate bonds over US Treasuries is at historic lows.

During the next market reversion, the 10-year rate will fall towards zero as money seeks the stability and safety of US Treasuries. However, corporate bonds are a different issue. When high yield, or junk bonds, begin to default, investors will face sharp losses on the side of their portfolio they supposed was safe.

As prices decline it will trigger margin calls that will induce more indiscriminate selling. It happened in 2008 as the ‘Lehman Moment’ left investors helpless, watching the crash.

No market mean reverting event has ever been based on the same issues that caused the previous event. The next event won’t be the same as any past event either. Only the outcomes remain the same.

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