What Ballooning Corporate Debt Means for Investors
The comments below are an edited and abridged synopsis of an article by Frank Holmes
David Rosenberg of Canadian wealth management firm Gluskin Sheff and Associates predicts another recession this year. The Fed has been too aggressive, tightening liquidity when corporate debt is at an all-time high. The Trump administration has already enacted fiscal stimulus in the form of tax reform, which has historically been reserved for times of economic turmoil, not expansion.
Since the last recession, corporate debt has risen to more than $9 trillion (November 2018), nearly half of US GDP. Each recession going back to the mid-1980s coincided with elevated debt-to-GDP levels.
Through 2023, as much as $4.88 trillion of this debt will mature. Because of higher rates, many companies are having difficulty making interest payments on their debt, which is growing faster than the US economy.
On top of that, the fastest-growing type of debt is riskier BBB-rated bonds—just one step up from junk. Combine this with tighter monetary policy, and it could mean trouble in the coming months.
Business cycles are killed off by the Fed. Charts show that commercial and industrial loan delinquency rates, overlaid by fed fund rates, shifted 10 quarters ahead. This suggests that roughly 10 quarters after the Fed began to tighten, loan delinquencies surge.
The good news is that it’s been more than 10 quarters since the Fed started raising rates in December 2015, and so far there hasn’t been a noticeable increase in delinquencies.
Could this be because the rate hikes this cycle have been small relative to those in past cycles? According to Rosenberg, it’s not the amount that matters so much as the change. Whether rates go up 2% or 0.25%, it can still be a shock to the financial system.
It could be time to consider how to prepare. Rosenberg recommends overweighting fixed-income and REITs. Holmes would add gold to that mix, as it’s performed well as a store of value during economic pullbacks.
Metals Focus, a commodities research group, reports that global gold demand will climb to its highest level in four years. They see gold benefiting from a more dovish Fed and fears of a global economic slowdown.