The $300 Trillion Hangover

Looming corporate bankruptcies, a commercial real estate crisis and the junk bond time bomb...

(Source: Getty Images)

Bill Bonner, reckoning today from Poitou, France...

Yesterday, the morning trading on Wall Street took a now-familiar form: stocks went up. By the end of the day, the Dow was up another 1%.

What are we to make of it? Is it ‘risk on’ again? Is it time to load up on stocks?

The answer is ‘no.’ And today we give you ‘no-plus,’ the real secret to Wall Street’s boom-y-ness.  

‘Don’t fight the Fed’ has been one of the most successful formulae on Wall Street. But it’s not foolproof. And not complete.

When the Fed switched from enabling inflation with zero rates in 2020…to trying to curb it by increasing rates in 2022…an investor would have been well advised to switch too – from buying the dips to selling the bounces. Stocks went down.

Doom, Gloom and Boom

But then, they didn’t go down. The ‘bounce’ has now gone on for 9 months. It has created a whole new group of rich people – the AI Millionaires. And it has produced what looks to many like a new bull market…with the best 6 months for the Nasdaq in history…and more to come.  

Not only that, but the US economy, too, has so far resisted its long overdue rendezvous with the business cycle. Where’s the recession? Where’s all the doom & gloom we promised?

A broader question worth asking: did the geniuses at the Fed finally get the hang of managing a $24 trillion economy…so that their own errors disappear, without pain or embarrassment? The Fed put interest rates far too low and left them there far too long, resulting in far too much debt throughout the world economy. What happens next? Economists argue over a ‘hard landing’ or a ‘soft landing’…but what if there’s no landing at? What if the party never ends?

Maybe so. But buckle your seat belts; turbulence ahead. Here’s a headline story from Bloomberg:

A $500 Billion Corporate-Debt Storm Builds Over Global Economy

Fears of a credit crisis have receded. But a wave of corporate bankruptcies is building now that an era of easy money has come to an end.

And here’s another:

The $785 Billion Junk-Bond Maturity Wall Has Never Been So Close

The world’s riskiest borrowers are starting to run out of easy-money era financing and feeling the pinch as they return to a tougher market shadowed by aggressive central banks.

Junk-rated companies staring down a $785 billion maturity wall are in a race against time to replace debt that they secured when major central banks across the world slashed rates and boosted quantitative easing programs to keep economies afloat in 2020. On average, these companies now have 4.7 years to put fresh financing in place, the least amount of time ever, according to a Bloomberg global index.

Bloomberg is not letting up.  The stewards should take their seats:

The World’s Empty Office Buildings Have Become a Debt Time Bomb

From San Francisco to Hong Kong, higher interest rates and falling property values are bringing the commercial real estate market to a perilous precipice.

In New York and London, owners of gleaming office towers are walking away from their debt rather than pouring good money after bad. The landlords of downtown San Francisco’s largest mall have abandoned it. A new Hong Kong skyscraper is only a quarter leased.

The creeping rot inside commercial real estate is like a dark seam running through the global economy. Even as stock markets rally and investors are hopeful that the fastest interest-rate increases in a generation will ebb, the trouble in property is set to play out for years.

$300 Trillion Overhang

Remember that we are in a transition period, from one primary trend to another.  After 4 decades of lower and lower interest rates…which reached ridiculous lows after the 2009 crisis in housing finance…the world now has a $300 trillion overhang of debt. Some government debt. Some corporate. Some household.

All of this debt is subject to interest rates…that are now going up.

Debt does not get refinanced overnight. It takes time. But when it is time to go back to lenders, debtors find their interest charges approximately twice what they were a few years ago.  

Meanwhile, households are still running down their savings – which were built up during the Trump/Biden stimmie giveaways. And the US government – the world’s biggest consumer, as well as its biggest debtor – is now spending more than $2 trillion more than it receives in taxes, each year. That too must be financed…at rising cost.

So far, the giant balloon is still floating along nicely. Full employment. Rising stock prices. Joe Biden crows about what a great economy he has created. But the real secret is that the ‘tightening’ has hardly begun. There are lots of ways of measuring inflation. The most reliable is the ‘trimmed mean’ index…which puts today’s inflation at about 5%. Interest rates have moved up dramatically. Inflation has come down. But so far, the real, after inflation cost of credit (money) – based on the Fed Funds rate – is still only about zero. The Fed is not exactly fighting inflation tooth and nail, in other words.

But interest rate hikes are only a part of the inflate-or-die picture. While monetary policy sobers up, fiscal policy turns to the bottle. More…tomorrow.     

Regards,

Bill Bonner

Joel’s Note: Meanwhile, American workers are demonstrating a certain degree of risk aversion, at least when it comes to their openness to relocate for a new position.

According to outplacement firm Challenger, Gray & Christmas, the rate of Americans moving for work fell to a record low of just 1.6% in the first quarter of the year. That was the lowest rate of movement since the firm began keeping an eye on the trend, which has been in steady decline for the better part of four decades. Take a look…

What does this say about the famous “pioneering” attitude of the great American workforce? About one’s ability to buy and sell a home, or even refinance a mortgage? About optimism for the future in general?

Some experts argue it’s evidence of a decline in the dynamism of the U.S. economy. But maybe it’s just Zoomers working from the couch (which would explain in part all those empty office buildings)…or Boomers who retired during the pandemic, not to return to the workforce, staying put…

And for those remaining workers, retirees and savers who are willing to relocate, whether motivated by hopes for a brighter career, or seeking tax efficiency, a better lifestyle or for any number of other reasons, does this present opportunities in overlooked markets, states, or regions of the country?

We’ll be catching up with Bonner Private Research’s macro-analyst, Dan Denning, in just a few hours to talk about all this in the context of his Bolthole Report. BPR members can expect the entire Private Briefing – along with a full transcript – to be available for them this Sunday.

If you’re not already enjoying BPR’s growing archive of member’s only content –including Private Briefings, Special Reports, twice weekly Research Notes, the BPR Official Stock Watchlist and plenty more – now’s a good time to get on board. Find a membership plan that fits you, here…