more leveraged today than they were before the last financial crisis. Making matters worse, $3.5 trillion in debt is coming due over the next three years. Something has to give... It’s clear that we’re nearing the end of the current cycle. When the current credit bubble pops, enormous amounts of capital will be lost, wiping out unprepared investors. By paying attention to one key warning sign, you’ll be able to spot the danger before most people... I believe the bubble will pop when the majority of banks are tightening credit. That’s when they start demanding higher interest payments and greater credit protections (or worse, cutting off credit completely to some companies). The banks hold all the cards. They are the
Most companies can’t afford to pay off their debt when it comes due. Instead, they rely on banks to refinance it. For most of this cycle, banks have been loosening credit and refinancing the debt – even as corporate debt has ballooned and credit quality has weakened. The banks have been kicking the can down the road. Many companies that can barely afford their interest payments have been on “life support.” But this game can’t go on forever... Interest rates are rising at the same time massive amounts of debt are coming due. Eventually, banks will refuse to take on the added risk. Suddenly, many companies won’t be able to refinance their debt, forcing them into bankruptcy. The default rate will rise sharply, causing investors to dump their bonds. And since the high-yield bond market is far less liquid than the stock market, many bond prices will quickly fall off a cliff.
Many companies that can barely afford their interest payments have been on “life support.” But this game can’t go on forever...
linchpin that has kept the credit bubble alive.
U.S. CORPORATE DEBT
Corporate debt has soared since the financial crisis (19-year chart)
$9
46%
$8
44%
$7
42%
$6
40%
$5
2000 2002 2004 2006 2008 2010 2012 2014 2016
2018
American Consequences
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