Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://www.cecaust.com.au
Incredibly, at the Jackson Hole Economic Policy Symposium on 25 August central bank heads such as the US Federal Reserve’s Janet Yellen and European Central Bank chief Mario Draghi praised the job they have done to make the banking system “safer”. Their only warning was that Dodd-Frank and associated EU bank regulations not be relaxed. Nothing was mentioned about the fact that the US Fed’s own attempts to begin to unwind Quantitative Easing (QE)—the money-pumping which alone has kept the world’s biggest banks afloat—is now the greatest trigger to blow the whole system.
US banks themselves “warned” the US Treasury on 2 August that even slight resulting upward moves by interest rates threaten a cascade of falling junk-type debt, which totals US$2.5 trillion in the US corporate debt bubble. It threatens the equivalent of margin calls on the much greater volume of “financial engineering” debt which companies have taken on in order to buy their own stock or make mergers. Former Fed Chair Alan Greenspan has himself warned that the global bond market bubble is ready to crash.
Commercial bank lending was never increased by QE, it only served to prop up the speculative bubble that caused the crisis in the first place. Lord Nick Macpherson, a former senior UK Treasury official, recently likened QE to a drug addiction: “QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase. Time to move on”, he wrote on Twitter on 21 August.
Wall Street On Parade, in a 24 August article titled “Corporate Debt Threatens US Economic Prospects”, reminded readers of three recent warnings regarding corporate debt, from the IMF, S&P and the Securities Industry and Financial Markets Association (SIFMA).
Several red flags were raised in an April IMF report, authors Pam and Russ Martens say, including: The US corporate sector added US$7.8 trillion in debt and other liabilities since 2010; median net debt of S&P 500 firms “is close to a historic high of more than 1 ½ times earnings”; broader surveys of corporate balance sheets “suggests a similar rise in leverage across almost all sectors to levels exceeding those prevailing just before the global financial crisis”; debt is especially high “in the energy, real estate, and utilities sectors, ranging between four and six times earnings”; “The average interest coverage ratio—a measure of the ability for current earnings to cover interest expenses—has fallen sharply over the past two years. Earnings have dropped to less than six times interest expense, close to the weakest multiple since the onset of the global financial crisis.”
A July 2016 S&P Global report found that “global corporate credit quality has been weakening over recent years”. In a survey of around 14,400 nonfinancial corporations word wide, “two out of five” are highly leveraged. As credit growth slows, the report said “it is not hard to envisage more negative outcomes where a credit crunch (‘Crexit’ scenario) occurs, should inflation return, rates rise, and bond prices fall. Alternatively, a worst-case scenario comprising several negative economic and political shocks (such as a potential fallout from Brexit) could unnerve lenders, causing them to pull back from extending credit to higher-risk borrowers.”
Wall Street trade group SIFMA found in December 2016 that if short-term money market borrowings are added to outstanding corporate debt, the total is a massive US$11.3 trillion. A Financial Times report on the subject stated: “Much of the debt sold by companies in recent years has been used to buy back their own shares, pay out higher dividends or finance big mergers and acquisitions. While these buybacks funded by cheap borrowing have boosted earnings, a missing ingredient has been spending on investment to build their businesses.”
In a 22 August article, “Wall Street Banks Warn Downturn Is Coming”, Bloomberg Business ran the kicker: “HSBC, Citigroup, Morgan Stanley say end of market boom is nigh! Breakdown in trading patterns is signal to get out soon!” The article reported that “HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.
“Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.”
In one sign of trouble in debt markets, 140 year-old British sub-prime lender Provident Financial announced shock losses, and suffered a massive share plunge. The lender specialises in small loans to low-income borrowers in the UK and USA. The company’s shares fell over 70 per cent after it announced expected annual losses of between £80 and £120 million on 22 August; dividends are not expected to be paid and the CEO has stepped down.
The above warnings point to the urgency that governments break up the Too-Big-To-Fail (TBTF) banks, ensuring the corporate debt and other bubbles are unwound in an orderly way. Legislation modelled on the successful US Glass-Steagall Act of 1933 is the only sane way to break up the TBTF banks and guarantee credit is directed to the real productive economy rather than speculation.
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