Tuesday, July 15, 2014

15/7/2014: Covenant-lite Debt Mountain & the Great Unwinding...


Recently, I wrote about IMF findings that the corporate and household debt mountains in the euro area remain unaddressed. Here is the World Gold Council chart on issuance of new covenant-lite corporate debt in the US:

The new age of complacency is emerging, defined by the ease of debt raising and low volatility:

Which, of course, can mean only two things:

  1. There will be reversals out of status quo.
  2. Low volatility implies reduced returns on investment and capital. This, in turn, implies lower investment and capital, which means lower growth and higher inflation into the future
With a caveat that we do not know the timing of the above changes, one has to keep in mind that the longer the status quo pre-1&2 remains in place, the worse 1&2 will be.

So there it is, a set up for gradual, painfully stagnant and prolonged unwinding of the extraordinarily accommodative monetary policies of the recent past...
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