On the heels of the Dow and the Nasdaq tumbling, it appears we are now on the brink.
May 8 (King World News) – Here is a small portion of what Peter Boockvar wrote today as the world awaits the next round of monetary madness: The noteworthy part of the newly issued financial stability report from the Fed yesterday was what they said about excessive corporate debt.
“Borrowing by businesses is historically high…with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards…Credit standards for new leveraged loans appear to have deteriorated further over the past six months…The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors.”
Make no mistake that it was Fed policy that encouraged the corporate gorge on debt so it’s no different than letting kids play with matches and then express worry if a fire starts. And what a conundrum they now have. If they cut rates at some point, they would only encourage more leverage and if the economy slows, rising defaults were occur. If the economy strengthens, they may need to raise rates, aka the cost of capital. This all said I do think many companies have gotten the message to delever and hopefully many take heed…
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There was some noteworthy stats in yesterday’s quarterly Senior Loan Officer survey from the Fed. With respect to commercial real estate loans:
“Banks reportedly tightened standards across all three major CRE loan categories” and loan demand for all three “weakened during the same period.”
Demand for commercial and industrial loans fell across the board while lending standards were mixed. As for the consumer:
“Banks reported weaker demand for almost all categories of residential real estate loans and for credit card loans, while demand for auto loans was basically unchanged.”
We have to ask ourselves whether this is late cycle type behavior where 10 years of taking on more debt if one is a company and in real estate has resulted in a time out and higher credit card interest rates is impacting consumer spending (see chart below).
CONSUMER ON THE BRINK: Average Credit Card
Interest Rate Hits New High
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