Fed: Too Little, Too Late

Written by Adam English
Posted February 5, 2019

Last year, I wrote an article about what I and some others are calling the Great Hangover.

Specifically, it was about how the Fed has lured, and backed into a corner, a lot of corporate America by making it impossible to refuse cheap debt.

I wrote then that we should be worried about the Fed’s ability to pull the punch bowl away from the party.

Now, I think it’s time to revise that, because I think I was wrong.

For a lot of companies, and thus for a big chunk of the economy they support, I think it is already far too late.

New Info And A Darker Outlook

Let’s take a quick look at what I wrote:

The bills are coming due. Either they get paid or rotated into new debt that is significantly more expensive.

Global debt has reached a record $237 trillion. That’s more than 327% of global GDP.

Overextended debt played a key role in blowing up the global economy about a decade ago, and debt has increased by $68 trillion, or more than 50% global GDP, since then.

As the Fed, and thus everyone, increases interest rates, the risk to highly indebted borrowers — corporate and sovereign — will cause rapid increases in financing costs that disproportionately affect illiquid and riskier high-yield bonds.

Exactly the same high-yield bonds that have attracted so much money during the engineered “risk off” QE programs.

Higher rates will also create large mark-to-market losses on existing debt. A 1% increase in U.S. government bond rates is estimated to exceed $2 trillion on the global scale.

Earnings reports will be dismal, collateral used to secure loans will become insufficient, and economic growth will be sluggish at best as asset values slide.

All of that is certainly still true, the problem is that I omitted a lot of what is going on down at the low end of the corporate ladder.

It is increasingly becoming apparent that small firms, which account for half of U.S. economic production, are already starting to go belly up.

Troubling Figures

Unfortunately, data for these small firms can be fragmented or hard to find. They simply don’t factor in to a lot of industry and trade group figures. They’re too small and numerous to get good data from.

The Institute of International Finance Inc, a trade group for financial institutions, recently released some troubling data on them, though.

The number of companies struggling with debt obligations is hovering near record highs. Roughly 17% of publicly-traded U.S. companies had trouble making debt interest payments at the end of last year.

Note — interest payments. Virtually all of their earnings that don’t keep the lights on are going to lenders but are not putting a dent in principal.

That means no new jobs, no expansions, no machines, or new revenue sources or reduction of total debt.

They’re already effectively zombie firms, just limping along until they magically see a windfall of profit (imagine the odds), or they collapse under one bad financial blow, or they simply collapse under rising interest rates.

The Headline Number Propaganda

You aren’t going to hear from the Fed or its stalwart defenders that companies that are responsible for 8.5% of the domestic economy (17% of the companies responsible for half of economic production) are on the verge of collapse.

You aren’t going to hear about how the decades of guesswork with fancy sounding code words echoing down from the ivory tower like “extraordinary measures” and “quantitative easing” and “neokeynesian policies” are only now starting to be tested, and it already looks dire.

You aren’t going to hear about how, if and when things get bad, the Fed will ditch its “dual mandate” (there’s another one) and gear the economy to protect the wealth of its patrons, the international banking and finance firms.

You won’t hear a peep from the Fed about how it set itself up to fail, and you to own the smoldering wreckage the next time something goes wrong.

Do yourself a favor. Make sure you are moving away from the convenience of the investments that will suffer the most.

Don’t let a financial advisor chase yields into increasingly questionably-rated bonds. Be very careful of what funds — passive, active, and total — your accounts own.

Make sure you diversify into investments that can perform in spite of the stock market or dollar.

There isn’t a new economic windfall coming to reinflate the companies on the verge of collapse. Just the opposite. It’s about time for the free market to cull the weak.

Take care,

adam english sig

Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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