This Turbocharged Debt Cycle Will End Miserably—It’s Just A Matter of When
The comments below are an edited and abridged synopsis of an article by David Rosenberg
The stock market is being driven by flows rather than by economic fundamentals. The ongoing wave of stock buybacks has taken the S&P 500 share count to 20-year lows, so to some extent the market now behaves more like a commodity. This was achieved primarily by the issuance of low-rated corporate debt. The baby boomer generation has done its best in a decade-long effort to build retirement savings, primarily in index fund purchases in their retirement plans.
Last year was the Chinese Year of the Pig, and plenty of lipstick was applied, primarily by central bankers. There is too much air underneath equity valuations, and there is no room for credit spreads to tighten any further. The world’s economic and financial problems have been papered over by even more debt, and we have hit leverage ratios that are unstable and unsustainable.
Rosenberg is worried. The central bank liquidity taps are likely to be turned on even more, but the effect at current valuation levels across the various risk asset classes will be more muted than it was last year. And there is the prospect that the monetary authorities will stay on the sidelines and await a budgetary tax cut or government spending response, which is futile given that fiscal policy in most countries is just as tapped out as monetary policy.
There are no easy solutions, and it is doubtful that we will have another year where central banks can transform the weakest period for global economic growth in a decade and pull another rabbit out of the hat in terms of massive excess returns for equity and corporate bond investors.