Record high corporate debt threatens the bond market, the stock market, and the broader economy, in the opinion of several respected analysts. One of them is Stephanie Pomboy, founder of economic consulting firm MacroMavens. More than a decade ago, she correctly warned of the impending subprime mortgage crisisa key precursor of the more general financial crisis that followed in Now Pomboy sees troublesome similarities in today's debt markets.
In the U. Source: Barron's. The definition of a leveraged loan is somewhat fluid, but the basic concept is that the borrower already is saddled with significant debt, and thus represents significant risk to the lender.
Junk bonds, also called high yield bondsare corporate debt obligations that are rated below investment grade.
Pomboy warns that high-yield ETFs pose a particular risk today, similar to that created by collateralized debt obligations CDOs in Back then, banks unloaded vast numbers of shaky subprime mortgages on securities firms. These mortgages were then packaged into debt instruments that somehow received high ratings, which, in turn, facilitated their sale to the investing public.
When overextended borrowers began defaulting on those underlying mortgages, the value of these debt instruments built upon them cratered. Today, ETFs that hold portfolios full of low-quality, thinly-traded corporate debt promise investors "abundant and immediate liquidity" that is as illusory as the quality of those mortgage-backed CDOs more than a decade ago, as Pomboy told Barron's.
That is, there has been a significant reduction in the number of market makers and potentially willing institutional investor s who are likely to step in and stabilize prices should a wave of selling hit these ETFs. Meanwhile, Bank of America Merrill Lynch finds that the liquidity premium in the high-yield market, or the extra yield that compensates investors for holding illiquid bonds, is at its lowest sinceper Barron's.
Adding to the risks, Pomboy observes, is that some of these high yield ETFs use leverage to magnify gains, while many investors buy on margin for the same purpose. The problem is, the use of leverage and margin also tends to further magnify losses when prices tumble. Putting U. Former Federal Reserve Chair Janet Yellen is among those who warn that this mountain of debt could "prolong" an economic recession and cause a wave of corporate bankruptcies.
He sees the possibility of a "negative ' financial accelerator ' effect with higher defaults" worsening an economic downturn. In another lengthy interview with Barron's less than a year ago, Pomboy identified massive consumer debt as a key risk for the U. Oxford Economics also indicates that the quality of leveraged loans is at all-time lows in both the U.
Additionally, they find that global private sector debt is a higher percentage of world GDP than before the crisis. Bond bulls may be quick to point out how many times the bears and the doomsayers have been wrong in recent years. Whether investors can fully protect themselves for the next credit bust is an open question. Fixed Income Essentials.The corporate debt bubble is the large increase in corporate bondsexcluding that of financial institutionsfollowing the financial crisis of — The corporate bond market historically centered in the United States.
Federal Reserve noted in November that leveraged loanscorporate bonds made to companies with poor credit histories or large amounts of existing debt, were the fastest growing asset class, increasing in size by Two-thirds of global growth in corporate debt occurred in developing countriesin particular China. Regulators and investors have raised concern that large amounts of risky corporate debt have created a critical vulnerability for financial markets, in particular mutual fundsduring the next recession.
Following the financial crisis of —08the Federal Reserve Board lowered short- and long-term interest rates in order to convince investors to move out of interest-bearing assets and match with borrowers seeking capital. The resulting market liquidity was accomplished through two steps: cutting the Fed Funds rate, the rate that the Fed charges institutional investors to borrow money; and quantitative easingwhereby the Fed buying trillions of dollars of toxic assetseffectively creating functioning markets for these assets and reassuring investors.
Why The Corporate Debt Bubble May Burst Sooner Than You Think
The success of the U. Fed in dropping interest rates to historically low levels and preventing illiquid markets from worsening the financial crisis prompted central banks around the world to copy these techniques. However, the effect of quantitative easing was not limited to the toxic mortgage bonds targeted by central banks, as it effectively reduced the supply of bonds as a class, causing prices for bonds generally to rise and bond yields to lower.
For over a decade, the artificially low interest rates and artificially low bond yields, have caused a "mispricing of risk" as investors continually seek out higher yields.
Fed noted in November that mutual funds held about one-sixth of outstanding corporate debt, but were acquiring one-fifth of new leveraged corporate loans. The size of high-yield corporate bond mutual funds, which specialize in riskier bonds, had doubled in the decade prior to While trade in corporate bonds typically centered in the U.
Companies that do not make enough profit to pay off their debts and are only able to survive by repeatedly refinancing their loans, known as " zombie firms ", have been able to turn over their debt because low interest rates increase the willingness of lenders to buy higher yield corporate debt, while the yield they offer on their bonds remains at near-historical lows.
In Brazil, one-quarter of all corporate bonds at a higher risk of default are in the industrial sector.JAG GÅR PÅ DEJT!!!
Bond investing in Europe closely followed the actions of the European Central Bankin particular the quantitative easing implemented in response to the European debt crisis. Investment-grade firms, those with a rating between AAA and BAA, were more highly leveraged than the high-yield "junk" firms. Observing that investors tend to divest bonds that are downgraded to high-yield, the New York Fed stated, "In the current corporate debt landscape, with a greater amount outstanding of BAA-rated corporate debt and higher net leverage of investment-grade debt overall, the possibility of a large volume of corporate bond downgrades poses a financial stability concern.
This has been done in place of long-term business investments and expansions. Tax Cuts and Jobs Act of December offered a tax holiday under the logic that firms would use the extra profits to increase investments.
Instead, it vastly increased an existing trend towards share buybacks, which increase the value of the remaining publicly traded shares and contributed to the rise of stock market indexes generally. Most leveraged corporate bonds are " cov-lite ", or covenant light, that do not contain the usual protections for purchasers of the debt. In some cases, cov-lite terms may force the purchaser of the debt to buy more debt.
A writer for Bloomberg News opined in February"If and when the credit cycle turns, the aggressive push toward weakening protections virtually ensures that recovery rates will be worse than in But there's no going back now: The risky debt markets are full of cov-lite deals. Investors either have to acclimate to that reality or get out of high-yield and leveraged loans. The Chinese government's reaction to the financial crisis was to direct banks to loan to Chinese state-owned enterprises SOEswhich then built factories and equipment to stimulate the economy despite the lack of demand for the products created.
It is often not clear the degree to which Chinese SOEs are owned by the state, making it difficult to differentiate corporate and sovereign debt. Government-directed lending gradually shifted from large banks offering loans to smaller local and provincial banks offering lightly regulated wealth management products. Inthe International Monetary Fund estimated that The Chinese government recognized the risk posed by corporate debt.
The 13th Five-Year Planunveiled inincluded financial reforms to reduce capacity in highly leveraged sectors.If the government seems addicted to adding to the national balance sheet, then Americans have a similar obsession for personal debt.
What does that look like today? There are different categories of personal debt, like mortgagesstudent loansand home equity loans. Some of these are healthy for economic growth. Having a mortgage is good if it lets you build equity. Student loans represent an investment in yourself and usually bring about higher future earning potential. Even if carrying certain kinds of personal debt at reasonable levels is a good financial decision, lots of Americans are in way over their heads.
Demand is soaring for subprime mortgageswhich caused the housing crash 10 years ago.
How Much Longer Until the U.S. Debt Bubble Bursts?
More than 44 million people carry a student loan and Credit card and home equity debt are both universally considered unhealthy because they fuel unsustainable levels of consumption in exchange for punitive interest rates.
Home loans are about 4. But credit card rates start at That includes things like payday and car title loans. There are really only two ways to pay it off. You either have to increase your income, or cut things from your budget. Either way, paying off debt requires the discipline to devote the extra cash toward a long-term goal. Select the way you want to use our Visualization. Thanks for your interest in purchasing a high-quality poster of this visualization.
These will be for sale soon. We will email you when we're ready, just drop your address in the box. If you'd like to use our visualization in books, magazines, reports, educational materials, etc. Send requests to: permissions howmuch. Want to use our visualization online, including on open publications like blogs, news sites, etc.?Right now the entire nation is buzzing about the very first debates for Democratic presidential contenders inand much of the focus of those debates will be on the economy.
No matter who has been in the White House, our insatiable appetite for debt has allowed us to enjoy a tremendously bloated standard of living that was far beyond what we actually deserved. And under no circumstance will Americans elect any presidential candidate that would suggest that we should be willing to accept a lower standard of living and quit going into so much debt. Everyone wants to hear that we will be able to have an even higher standard of living in the future, and of course that is what a lot of our politicians eagerly tell them.
Sadly, the reality of the matter is that we are at the very end of the greatest debt bubble in the history of the world, and the way we live is about to dramatically change no matter who we send to Washington. As I discussed yesterdaythe evidence that the U. In fact, a survey that was just released had some rather starting results. A new survey from financial information website Bankrate. Bankrate surveyed around 1, people and nine economic experts for the study.
The survey also included a question about when the next recession would begin. Everyday Americans also said they expect a recession to hit sooner than the experts predict. A fifth of Americans polled said they believe the recession has already begun, and 21 percent said they expected it to begin within six months or a year.
The Dashiki and What it Represents
Today, 59 percent of all Americans are living paycheck to paycheck, and U. People are partying when they should be preparingand this new economic downturn is going to catch most of us completely off guard.
And day after day we continue to get more numbers that are telling us that the economic outlook is very bleak. For example, it is now being projected that U. The U. Sales the following year were flat then dipped to But the first half of this year has plunged into negative territory. Edmunds anticipates sales for all of will drop to Every election cycle they spout the same nonsense, and it is amazing that anyone still falls for it anymore.
Right now, America is on a highly self-destructive path that only leads to economic oblivion.The U. In Februarythe U. At the consumer level, household debt which includes mortgages, auto loans, student loans, and credit card debt has risen for 19 straight quarters.
With these overarching trends in mind, we compiled 10 of our recent visualizations to show a more complete picture of debt in the U.
Another way to analyze the increase in national debt is to view it in conjunction with the political leaders of the time. According to other research conducted by The Balancethe national debt soared under certain presidents.
As shown in the previous visualization, the majority of the national debt was accrued over the past 40 years.
Corporate debt bubble
The only presidents in the past century who saw a decrease in the national debt are Warren G. Harding and Calvin Coolidge. The national debt is financed by the sale of treasury securities, specifically short-term treasury bills and long-term treasury bonds. While many treasury securities are held by the American public and government agencies, foreign countries are some of the bigger holders of U.
The good news is that the U. While the U. The visualization above uses data from the International Monetary Fund to illustrate debt-to-GDP ratios between countries, with the larger, redder countries toward the center representing the highest ratios. By this measure, the U. In the visualization above, we used data from the U. Census Bureau and the U. Large states like California, Texas, New York, Illinois and Florida have the highest output, as well as the highest debt.
Outside of government borrowing, household debt is another measure of economic health. Household debt is mostly composed of mortgages, credit cards, student loans, and auto loans. In this visualization, we used data from Credit Karma and the New York Federal Reserve to illustrate consumer debt per capita in each state. Across the U. Notably, mortgages are the largest source of total debt per capita in each state.
In addition to varying across location, household debt varies by age, too. For this visualization, we analyzed Federal Reserve data detailing debt and assets held by Millennials, Gen Xers and Baby Boomers with all numbers adjusted for inflation.The Dashiki, also known as Kitenge, is a popular type of clothing worn throughout Western and Eastern Africa. The Dashiki is among the top African inspired clothing, along with traditional African headwraps Dhukus and Kufi caps.
Its relaxed shape means zero constraints to certain body types, and can adorn all shapes from petite to plus size. The Dashiki can be worn both formally and informally designed for comfort during those times of intense heat. More formal Dashikis are mostly heavily embellished around the collar and chest. Those crafted in certain colors typically come with some significance. Grey is the traditional color for West African weddings, however, some groomsmen wear white during ceremonies.
Purple and lavender represent the color of African royalty, whilst blue represents peace, love and harmony. Black and red are the traditional colors worn for funerals. Aside from being a typical part of African fashion, the Dashiki holds symbolic significance with regards to African history. The bulk of its identity was influenced in America, but still stands proudly as African. The Civil Rights and Black Panther Movements between the s and '70s gave the Dashiki its political influence, becoming a representation of Black Pride, along with the raised fist and Afro.
The Dashiki was worn in protest to how African Americans were treated in the United States, becoming a representation to persist in the fight for full rights in American Society. Modern-day fashion now brands Dashiki as a ready-to-wear conveyor of African heritage, but it will always maintain its underlying cultural significance of imposing a powerful message.
Online stores such as yours truly, Grass-fields, offer customers a range of different types of African fashion, including Dashikis, with some offering a mix of African-inspired European clothing too.
Founded by Cameroonian twin sisters Michelle and Christelle Nganhou, Grass-fields was created with a simple aim to put the love back into African print clothing again.
To find out about what other African and Western-style print designs are available at Grass-fields, take a look here. During busy sale periods order processing may take longer up to 7 working days. We are happy to accept returns, any garment that is unworn and still fitted with all security tags and labels and that is despatched to us within 14 days of receipt by you.
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