Executive Intelligence Review


Looming Financial Crash Becoming Clear to Analysts

June 11, 2018 (EIRNS)—Even as they abjure and deny that it will really happen now, more financial analysts are seeing clearly that there will soon be a financial crash like that of 2007-08, triggered by masses of unpayable corporate debt.

A long Friday piece by Washington Post economic columnist Steven Pearlstein, “Beware the Mother of All Credit Bubbles” pointed to the oncoming collapse. “Now, 12 years later it’s happening again,” Pearlstein wrote.

“This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt—and a one-time tax windfall—to take cash from their balance sheets and send it to shareholders.... And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble—this one in corporate stocks and bonds—that, when it bursts, will send the economy into another recession.”

Pearlstein cites a very broad study by a European business school, that the firms surveyed spent more than 100% of their profits on buybacks 2010-15. U.S. publicly traded companies, as a whole, are reducing their equity by some $3 trillion, while their debt was record-high 73% of GDP in mid-2017; corporate junk debt was 11% of GDP ($2.2 trillion in mid-2017, over $2.5 trillion now). Corporate bond ETFs have $300 billion assets, 20 times the level at the time of the crash.

Worst, corporate loans are being securitized into collateralized loan obligations (CLOs) at the rate of $150 billion year in U.S. markets, doubling every year. Pearlstein cites the Moody’s “particularly large wave of defaults coming” report from May, which also observed the low level of liquidity in corporate debt markets; and the Treasury’s Office of Financial Research’s new report on “corporate debt flashing red.” He states that the debt taken by investment funds to buy securities is also at an all-time high.

“ ‘This is the mother of all credit bubbles’ ” he quotes an investor as saying, and Pearlstein concludes: “It’s hard to say what will cause this giant credit bubble to pop. A Turkish lira crisis. Oil prices topping $100. A default on a large BBB bond. A rush to the exits by panicked ETF investors.... Pretending it won’t happen is folly.”

The Wall Street Journal’s front page Monday included “Emerging Market Rout Feeds Contagion Fear.” With the Fed expected to raise rates again this week, the Journal wrote, “turbulence could spread from distant corners of the world to the U.S. and elsewhere, fueling a cycle of accelerating risk aversion.”

On another trigger—Deutsche Bank—Tageszeitung on June 4 ran a column quoting extensively from bank analyst Dieter Hein, who “advised” Deutsche Bank for several years after the 2008 crash. Hein says he’s not sure it can be saved from bankruptcy now—the investment bank has enormous, partially unknown risks on its books, and more big losses are to be expected. Hein says DB is not bankrupt yet, but it is a warning sign that many so analysts are now considering its possible bankruptcy.