April 8, 2018—In an interview with CNBC on April 6, Scott Minerd, head of investing for Guggenheim Partners, pointed to ballooning corporate debt as the probable source of a major financial crisis in the 2019-2020 period. “As interest rates keep ratcheting higher, with record levels of corporate debt it’s going to be harder and harder to service,” Minerd said. “At some point, as the economy starts to mature and as cash flows start to stabilize and decline, it’s going to be difficult for everybody to pay this interest.”
“Defaults are going to be concentrated in corporate America, where in the past downturn they were basically focused in areas of consumer activity,” he added.
“Ultimately, when the chickens come home to roost and we have a recession, we’re going to see a lot of pressure on equities especially as defaults rise, and I think once we reach a peak that we’ll probably see a 40 percent retracement in equities,” he concluded, in what is undoubtedly an understatement.
Minerd’s warnings echo those made last year by noted financial analyst and author Nomi Prins. In her 2017 wrap-up, Prins noted that the corporate debt of non-financial U.S. companies as a percentage of GDP has already reached the levels it had right before the 2007 crash. In fact, she adds, the situation is worse, since less of that debt has gone toward investment in the real economy, and more toward buying back their own stock. The crash will be worse as well. Prins supports an increase in regulation, including re-imposition of Glass-Steagall.
Both Minerd and Prins point to the Fed’s gradual increase in interest rates as the trigger for the crisis. Indeed, that rise has already pushed up the London Interbank Overnight Rate (LIBOR) to the point that companies loaded with floating rate debt are seeing a rapidly increase burden of interest payments. This will only accelerate the crisis.
In other words, there’s a lot more than trade policy rocking the stock market. And no one in the Administration is doing anything to deal with the underlying causes of the coming crisis.
Tags: crash, Nomi Prins, Wall Street