Credit Bubble Bulletin: The Solvency Problem
The comments below are an edited and abridged synopsis of an article by Doug Noland
It’s a different world now that COVID-19 is here. And while ‘whatever it takes’ can accommodate speculative deleveraging and support market liquidity, the solvency problem will prove a challenge. The global economy has commenced a major downturn, hitting an already impaired global financial system. Emerging market debt is turning toxic. Energy-related debt is already toxic. Risk of general business and real estate debt turning toxic is growing rapidly.
This is an environment hostile to speculative leverage. It ensures a fundamental tightening of financial conditions and attendant downward pressure on global asset markets—securities and real estate, in particular. And with Ben Bernanke’s 40-year bond yield ‘ski slope’ at the end of a historic run, central banks have little capacity for using rate cuts to reflate asset prices.
The US economy is in trouble. Europe is in greater trouble. Emerging market economies face a disastrous combination of financial and economic hardship. And just as China moves to restart its economy, the massive Chinese export sector is confronting collapsing global demand. How long Beijing can hold things together is a critical issue. In the theme of bursting bubble economies and unfolding solvency problems, no country faces greater challenges than China (with its deeply maladjusted economy and gargantuan financial sector).
Up for discussion: the week in review; currencies; commodities; coronavirus; market instability; global bubbles; the Trump administration; the Federal Reserve; the US bubble; fixed income bubbles; China; central banks; Europe; emerging markets; Japan; leveraged speculation; and geopolitics.