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Debt, Cheap Money’s End, Could Devastate

August 12, 2019

Our fall off the next financial cliff could be sooner rather than later.

 

When most people are denied credit, like having a credit card declined at a restaurant, a pit in the stomach follows.

 

Now imagine if you needed that credit to get by day-to-day and were denied. You might really get sick.

 

Well, that’s about to happen in corporate America. Hundreds of firms that borrow regularly (and are already heavily indebted) will soon be denied credit. When it happens, the ones in the worst shape will have nowhere to go.

 

And then, markets will suffer.

 

Of course, with returns so high, many investors forget that debt has driven this bull run, especially corporate stock buybacks.

 

But now Corporate America is $9 trillion in debt. And the money didn’t go to new factories or technology. It was used to buy stock.

 

When you combine heavily leveraged firms with “deadweight” companies that can’t pay their current debt, yet are propped up by lenders, it feels like we may be careening towards a cliff.

 

In fact, about one in six U.S. firms can be classified as “deadweight.” That’s nearly 17 percent of the economy. When banks with low lending standards are the only thing keeping some businesses alive, we could be in trouble.

 

However, banks may soon profit more from denying loans than making them. See, bankruptcy proceedings favor banks – Moody’s says banks recover more than 80 percent of their loan values in bankruptcy. Bond holders, on the other hand, get less than 40 percent back.

 

Are we ignoring another bubble? Maybe. Janet Yellen warned us in October 2018.

 

This can’t go on forever.

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