When the U.S. falls into a recession, a credit bubble will explode, says JohnFMauldin
The European Central Bank this month said it would keep record-low interest rates for longer. The news comes shortly after the U.S. Federal Reserve gave in to the stock market and held off on further interest-rate increases.This stimulus may indeed buy the market an additional year or two. But postponing the inevitable downturn with artificially low rates will come at a cost. The cost is a massive credit bubble that is already of biblical proportions. Its implications chill me to the bone.
This pattern broke down in the last decade. We had an especially painful contraction followed by an extraordinarily weak expansion. Gross domestic product growth should reach 5% in the recovery and prosperity phases. It’s been around 3% since 2008.“To me, it is a very simple message being sent. We must understand that we no longer have economic cycles. We have credit cycles that ebb and flow with monetary policy.
That’s not how it works when the credit cycle is in control. Lower asset prices aren’t the result of a recession. They cause the recession. That’s because access to credit drives consumer spending and business investment. Take it away and they decline.The last credit crisis came from subprime mortgages. Those are getting problematic again. But I think today’s bigger risk is the sheer amount of corporate debt, especially high-yield bonds.
Liquidity crisis You see, it’s not just borrowers who’ve become accustomed to easy credit. Many lenders assume they can exit at a moment’s notice.1. Corporate debt issuance, especially high-yield debt, has exploded since 2009.Both are problems, but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major banks’ market-making abilities by around 90%. For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap.
Credit collapse will lead to recession To make matters worse, many of these lenders are far more leveraged this time. They bought their corporate bonds with money borrowed at record-low rates. And they’ll continue doing so as long as central banks keep them low.
France Dernières Nouvelles, France Actualités
Similar News:Vous pouvez également lire des articles d'actualité similaires à celui-ci que nous avons collectés auprès d'autres sources d'information.
Why out-of-control bubble-era mortgages still threaten to smash major U.S. housing marketsThis bubble-era mortgage trick could smash major U.S. housing markets, says kjurow
Lire la suite »
U.S. corporate leaders are getting worried about a recessionLatest earnings calls in particular show growing concerns about the health of the American, and global, economy.
Lire la suite »
The U.S. should get more credit for ending slavery ‘within 150 years,’ Fox panelist says“They keep blaming America for the sin of slavery,” Fox News contributor Katie Pavlich began. “But the truth is, throughout human history, slavery has existed, and America came along as the first country to end it within 150 years. And we get no credit for that, to move forward and try to make good on that.”
Lire la suite »
U.S. mortgage requests hit two-month peak as loan rates fallU.S. mortgage applications for buying or refinancing a home climbed to a two-mon...
Lire la suite »
U.S. factory orders barely rise; shipments fall furtherNew orders for U.S.-made goods rose less than expected in January and shipments ...
Lire la suite »
10 NCAA tournament bubble teams that are sweating out Selection SundayHere's a look at 10 NCAA tournament hopefuls sweating the most on Selection Sunday while waiting to find out their March Madness fate.
Lire la suite »
Ferrari's bubble bursts in Australian disappointmentEarly warning signs that all was not well at Ferrari came to a head on Sunday as...
Lire la suite »
Kabul's expanding foreigner 'bubble' trades safety for isolationKabul's green zone is a place where diplomats fly in cheesecake from New Yo...
Lire la suite »
March Madness bubble watch: Conference tourney winners and losers before Selection SundayWith Selection Sunday just days away, USA TODAY Sports tracks which teams hurt or boosted their NCAA tournament profiles in league tourneys.
Lire la suite »
US manufacturing output falls for a second straight monthUS industrial production rose 0.1% in February, vs 0.4% increase expected
Lire la suite »