Global recession back on track

US stocks have lost $1.6 trillion in value just in January. The market value of corporations worldwide continues to melt away.

MSCI-nearing_bear_market

The MSCI world equity index shows the post-2008 recovery stopping in mid-2014, failing in 2015 with the oil glut and mounting corporate debt, then turning to a rout in 2016 with the Fed’s rate hike and China’s slowdown.

Corporations aren’t just squeezed by the decline of their market value but also the debt they accumulated during the post-2008 easy money bonanza, which they aren’t earning enough to service any more because profits are down globally.

Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies — one third globally — are failing to generate high enough returns on investments to cover their cost of funding.

We’ve never been in a cycle quite like this,” said Bonnie Baha, a money manager at DoubleLine Capital in Los Angeles, which oversees more than $80 billion.

Companies’ debt costs are reaching new heights. As of the second quarter, high-grade companies tracked by JPMorgan Chase & Co. incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysts.

The cost of raising and servicing capital is outweighing the returns companies get from it, a problem that Citigroup’s Financial Strategy and Solutions Group said has affected one third of all companies — the majority of which posted shortfalls in each of the past three years.

Bloomberg, January 28, 2016 

corporate_debt_rising

Corporations are more indebted now than they were immediately after the 2008 crash

CAPEX2014

Fully 30.5% of US capital expenditures in 2014 were in the energy sector, accounting for a major activity in the financial sector, all of which now threatens to trigger a new subprime chain-reaction of defaults with the collapse of the oil business.

A lot of that debt is the oil sector, which is being driven out of business by falling revenues after years of unprecedented debt-financed spending on expensive shale oil and deep-sea projects.  In 2014 the energy sector accounted for the highest capital expenditures in the US. It’s the new subprime credit boom, as many small companies bought fracking gear on credit with only their now-worthless patches of oil shale as collateral. Only 2% of bank loans went to frackers but subprime mortgages were also a similarly small quantity. It was the CDOs into which they were packaged and the CDSs bought to insure them against default that amplified the problem into a global meltdown. Nothing has changed since then, the banks are still setting up the same Ponzi schemes.

“The energy space was the fastest growing part of the U.S. economy post-financial crisis and now it reverses. Businesses are shuttered and people are laid off,” said Nick Sargen, who helps manage $46.2 billion as chief economist and senior investment adviser for Fort Washington Investment Advisors Inc. “There are some people beginning to worry that this thing could spread like the subprime crisis. People had said then that it was too small to matter, and then you find out there are linkages you didn’t know about.”-Bloomberg, February 1, 2016

 

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