$195 Billion Asset Manager: “The Time Has Come to Leave the Dance Floor”
It’s surprising how, having covered the unprecedented growth in US corporate debt over the past few years, that some are still amazed by what is taking place on corporate America’s balance sheets.
TCW Group’s Tad Rivelle is the latest to observe that “corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle.”
“The credit-fuelled expansion inevitably comes to a bad end,” Rivelle, chief investment officer for fixed income at TCW, said in a recent note to investors. “We’ve lived this story before.”
He’s right: Corporate leverage in the US continues to soar to new highs, and in September sales of company bonds passed $1 trillion for the fifth consecutive year. Total company debt is at a record 2.4 times collective earnings as of June. The ratio fell to 1.7 in 2010 when the US economy started recovering from the Great Recession.
Rivelle blames central bankers for fueling asset bubbles, which are bound to collapse as leverage goes up faster than income available to service debt. “Our counsel remains as it has been: Avoid those assets that will be broken in the coming de-leveraging while keeping a ‘steady as she goes’ attitude towards the future purchase of those assets that will merely bend when the flood comes,” Rivelle wrote.
His other observations are just as dire in their stark admission of just how scary reality has become.
When the supposed solution to the Fed’s dilemma is merely a new problem, the cycle’s end is approaching. Avoid those assets that will be broken in the coming de-leveraging while keeping a ‘steady as she goes’ attitude towards the future purchase of those assets that will merely bend when the flood comes.