American Consequences - June 2018


Financial follies and disaster in the making

problems for now, there are some signs of potential trouble beneath the surface. Shares of several highly indebted companies have been crushed of late, and the names might surprise you... businesses like mobile telecom Sprint and rental-car agency Hertz. And more important, the so-called “risk spread” in bonds (the difference in risk between high-yield bonds and “safe” government bonds) now appears to be moving higher for the first time in years. Most broad measures of consumer credit stress – like the “risk spread,” and default rates on credit cards, mortgages, and student and auto loans – remain relatively low. But there are reasons for concern. According to recent Federal Reserve data, credit-card delinquencies at the 100 largest U.S. banks sit at 2.5%. This is up from a low of roughly 2% in 2015, but is still well below levels that have warned of previous crises.

A trillion-dollar crisis could be around the corner... Consumer debt – which actually fell for several years following the 2008-2009 financial crisis – has soared to a new all-time high of more than $13 trillion. (That’s more than $500 billion above pre-crisis levels.) U.S. federal debt has more than doubled from a little less than $9.5 trillion in the first quarter of 2008 to more than $21 trillion today, while corporate debt has soared from roughly $3 trillion to a record $6.1 trillion. What could possibly go wrong? There is no doubt a huge amount of this debt will go bad, and another crisis will likely follow. But it’s the “when” that we have to worry about... And we could be getting close. The Federal Reserve is now raising rates and withdrawing stimulus for the first time since this boom began. And while the markets generally remain unconcerned about these

14 June 2018

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